Stock Analysis & Ideas

Why Alibaba Stock (NYSE:BABA) is Unattractive in the Short Term

Story Highlights

Alibaba has had it rough for the past couple of years in the stock market. The situation is unlikely to change anytime soon, given the current market headwinds impacting its business. Hence, it’s best to wait for the stock to shed more value before wagering on it in the long run.

Chinese tech behemoth Alibaba (NYSE: BABA) has had a rough couple of years. Just when it seemed that its regulatory woes were in the rear-view mirror, the resurgence of COVID-19 in China and the troubling worldwide economic situation have thrown a wrench in its plans for a comeback. Nevertheless, BABA operates a highly-diversified tech business with a massive growth runway across most segments. Still, it’s tough to feel upbeat about its prospects, at least in the near term.

Hence, we are bearish on BABA stock for the short term.

As mentioned earlier, BABA stock has been under major duress over the past couple of years. It’s faced massive disruption amid the crackdown by the Chinese government. Fast-forward to 2022, and you have a potential recession on the horizon.

Stock markets have tanked since the start of the year as the world economy deals with many problems. Particularly in China, the coronavirus outbreak in major cities, including Shanghai, has significantly affected the Chinese economy. 

Moreover, the impact of the COVID-19 resurgence has been clearly reflected in the company’s first-quarter results, which we will dive into later in the article.

Nevertheless, I feel that the current bear market is an incredible opportunity to pick up BABA at multi-year lows for the long term, even though it’s likely not great for the short term. As the Oracle of Omaha Warren Buffet puts it, “be fearful when others are greedy and greedy when others are fearful.”

Bleak Earnings Performance

Alibaba reported its second-quarter results, and headline numbers were remarkably underwhelming. Revenues of $30.7 billion remained flat year-over-year, mainly due to the drop in sales from the China commerce segment. Moreover, operating income and adjusted EBITA figures dropped by 19% and 18%, respectively. Also, non-GAAP net income declined by 30%. Perhaps the brightest spot for the company was a 10% improvement in Cloud revenues. However, it forms just 9% of the company’s sales.

Its Chief Financial Officer Toby Xu states that the company did relatively well despite the macroeconomic challenges. He states, “We have narrowed losses in key strategic businesses, given ongoing improvements in operating efficiency and increasing focus on cost optimization.”

Another positive is its strong liquidity positioning. Free cash flow from the second quarter came in at a spectacular $3.3 billion, a 7% improvement from the prior-year quarter. Net cash from operating activities was $5.1 billion, a 1% increase from the same quarter last year, while its cash balance stood at an amazing $69.1 billion.

Alibaba Cloud vs. Amazon Web Services

As discussed earlier, the only bright spot for Alibaba was the 10% improvement in revenues it generated in its Cloud segment. Alibaba has been quickly growing its market share in China, and its cloud segment has been one of the most consistent segments for the company. However, its growth trajectory is comfortably dwarfed by Amazon’s (NASDAQ: AMZN) Amazon Web Services (AWS).

AWS has been a key contributor to Amazon’s top-line expansion over the past several quarters. It generated a tremendous $19.7 billion in sales for the firm in the second quarter alone, indicating a 33% improvement on a year-over-year basis. AWS’s contribution to Amazon’s total sales is at roughly 16% and is expected to rise to over 20% within the next couple of years.

Conversely, Alibaba Cloud generated $2.6 billion in sales during the second quarter, showing 10% growth on a year-over-year basis. Cloud sales represented just 9% of Alibaba’s total sales, while its core business constituted a dominant 76% market share.

Needless to say, Alibaba has a lot of catching up to do regarding its Cloud business. AWS is growing significantly quicker than Alibaba Cloud and holds a dominant position in the market. AWS is ranked the number one global cloud service while Alibaba is at a distant fourth, with just a 5% market share.

What is the Target Price for BABA Stock?

Turning to Wall Street, BABA stock maintains a Strong Buy consensus rating. Out of 18 total analyst ratings, 17 Buys, zero Holds, and one Sell rating were assigned over the past three months. The average BABA price target is $156.12, implying 97.3% upside potential. Analyst price targets range from a low of $130 per share to a high of $205 per share.

Conclusion: BABA Continues to Face Headwinds

Alibaba’s recent quarterly performances have been disappointing, with near-term prospects remaining bleak. Like other tech companies, it faces several headwinds that continue to weigh down the stock. Consequently, its stock has taken quite a beating, and it now trades near all-time lows.

However, it isn’t the end of the world for the company. It still has plenty of growth catalysts, including its Cloud business which could become a cash cow down the road. Still, it’s still far from reaching its true potential in the space.

Hence, BABA stock is arguably an unattractive short-term bet, especially for those unable to stomach the volatility. The stock market isn’t going to take too kindly to upcoming earnings misses, which seem likely given the current circumstances. It will take a while before BABA stock can return to its winning ways.

Disclosure

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