Stock Analysis & Ideas

What’s Restricting Alibaba Stock’s Upside Potential?

Story Highlights

Alibaba impressed investors with its better-than-expected performance in its most recent quarter. However, macro uncertainty and a soft consumption outlook restrict the stock’s upside potential.

Alibaba (NYSE: BABA) recently surprised investors with a better-than-expected Fiscal Q1 performance. However, the quarterly beat failed to lift the stock for more than one trading session. Slowing macro activities, a slowdown in its Cloud business, and increased competitive activity limit the upside in Alibaba stock. 

Citing the softness in consumption, Deutsche Bank analyst Leo Chiang lowered his revenue forecast by 1% for Fiscal Years 2023 and 2024. Chiang stated, “We anticipate geopolitical tensions, currency depreciation in Euro markets, and a slowdown in Southeast Asian markets to collectively weigh on the outlook for international commerce in the Sep Q.”  

It’s worth mentioning that Alibaba’s Cloud business is facing multiple headwinds, including slowing macroeconomic activities, weak demand from domestic internet customers, and declining revenues from top Internet customers. 

Chiang expects these headwinds to continue to hurt Alibaba’s cloud business in the September quarter. 

While Chiang sees multiple revenue headwinds for Alibaba, he retains a Buy recommendation on BABA stock on better margin expectations. The analyst expects BABA’s ongoing cost control efforts and its focus on reducing new user acquisition costs to support its net income.

Chiang expects Alibaba to benefit from the faster-than-expected economic recovery and sees its valuation as “defensive.” the analyst raised his price target to $160 from $155.

Is BABA Stock a Buy or Sell?

Wall Street analysts are bullish about Alibaba’s prospects. For instance, BABA stock has received 21 Buys, one Hold, and one Sell rating for a Strong Buy rating consensus. Meanwhile, the average BABA price target of $154.09 implies 68.5% upside potential. 

Though most analysts recommend a Buy, hedge funds have reduced their BABA stock holdings. Hedge funds sold 12.8 million worth of BABA stock in the last quarter. Moreover, Bridgewater Associates’ Ray Dalio BABA stock as well. 

Conclusion: Uncertainty Surrounds BABA Stock 

Alibaba’s focus on cost optimization and investments in its Cloud business will likely support its long-term growth. However, macro and regulatory uncertainty and increased competitive activity continue to play spoilsport and will likely hurt its prospects. 

Disclosure 

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