What Wall Street experts are saying about Alibaba ahead of earnings

Alibaba Group (BABA) is scheduled to report results of its fiscal third quarter of FY24 before the U.S. market opens on Wednesday, February 7, and will hold a conference call to discuss the results at 7:30 a.m. U.S. Eastern Time the same day. What to watch for:

ANALYSTS COOL ON ALIBABA: Last quarter, Alibaba reported Q2 adjusted EPS of $2.14, topping the consensus forecast of $2.11, on Q2 revenue of $30.81B that was nearly in-line with the consensus estimate of $30.77B. “Alibaba Group delivered a solid quarter, marked by renewed momentum and energy across multiple businesses as a result of our strategic reorganization. As we embark on a new phase of development, we have clearly defined our strategic focus and priorities. We will maintain an entrepreneurial mindset. We are committed to investing for growth and making bold decisions where necessary. Through a more flexible organizational governance mechanism, we aim to capture brand new opportunities from the ongoing AI technological transformation and create more value for our customers,” said CEO Eddie Wu.

In addition, the company said the expansion of U.S. restrictions on export of advanced computing chips has created uncertainties for the prospects of Cloud Intelligence Group. “We believe that a full spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement. Accordingly, we have decided to not proceed with a full spin-off, and instead we will focus on developing a sustainable growth model for Cloud Intelligence Group under the fluid circumstances,” Alibaba announced.

Following the report, Barclays said Alibaba scrapping its widely anticipated cloud initial public offering removes a near-term catalyst for unlocking value, disappointing investors. However, with all the regulatory uncertainties both in the U.S. and in China, on top of limited access to the most advanced chips, it may turn out to be the right decision longer term, the analyst tells investors in a research note. The firm says management of its cloud business can now focus more on building and growing the business than dealing with regulatory issues. It reiterated an Overweight rating on Alibaba.

The same day, BofA analyst Joyce Ju lowered the firm’s price target on Alibaba to $113 from $136 but kept a Buy rating on the shares. The group’s announcement to call off the Cloud spin-off and Jack Ma family’s filing to sell 10m BABA ADRs came as a big surprise, the analyst tells investors in a research note. The stock trades at an attractive valuation at 8x and 7x expected FY24 and FY25 expected adjusted EPADS, with the best exposure to benefit from potential China economy’s bottoming out, the firm added.

On November 30, Morgan Stanley downgraded Alibaba to Equal Weight from Overweight with a price target of $90, down from $110. The analyst listed a slower turnaround on CMR and cloud, the cloud spin-off withdrawal bringing uncertainty to the value-unlocking from reorganization, and the lack of a capital management catalyst without cloud distribution as negative developments weighing on the firm’s prior bullish thesis. The analyst added at that time that PDD Holdings (PDD) was its Top Pick in China e-commerce.

More recently, BofA analyst Joyce Ju further lowered the firm’s price target on Alibaba to $106 from $113 and maintained a Buy rating on the shares. The firm estimates Alibaba fiscal Q3 total revenue of RMB261b, which would be up 5% year-over-year. Such a deceleration from last quarter’s 9% year-over-year growth is primarily due to the near-term Taobao Tmall revenue “turbulence” as its shifts its focus to users, engagement, and orders, rather than sales and profit, during a strategic transition period. The firm cut its FY24-26 revenue estimate by 2%-4% and adjusted net income view by 3%-12% to reflect continued softness in domestic consumer demand and investments for Taobao Tmall’s longer term growth, AIDC’s global expansion and cloud’s AI potential.

Meanwhile last month, Barclays lowered the firm’s price target on Alibaba to $109 from $138 and kept an Overweight rating on the shares. The analyst does not think Alibaba’s near-term fundamentals will be key drivers for the shares and highlighted a few potential catalysts in 2024 and investor concerns. The firm cites lower group multiples for the target drop. Alibaba has a compelling valuation but patient is required, the analyst tells investors in a research note.

In addition, Mizuho lowered the firm’s price target on Alibaba to $100 from $120 and kept a Buy rating on the shares. In 2024, the analyst sees a “meaningful divergence of consumer confidence levels” between U.S. and China internet sectors. In the U.S., the firm expects moderated inflation and a tight labor market to keep consumer spending resilient, benefiting categories leaders across segments such as advertising, e-commerce and gig economy services that are likely to gain share and drive margin expansion. In China, it looks for consumer spending to remain subdued despite having a record high savings rate due to ongoing real-estate issues and rising unemployment. Mizuho recommends investors to “play offense” in U.S. internet, choosing companies with upside to estimates plus long-term optionality.

JACK MA SAID TO BUY MORE: In November, Jane Zhang of Bloomberg reported that Alibaba co-founder Jack Ma was pulling back on plans to trim his stake after the company suffered its biggest selloff in more than a year post earnings. Ma planned to sell 10M shares worth approximately $870M, a disclosure which coincided with the company’s scrapped plans to spin off its $11B cloud business. The announcement and quarterly results caused a massive drop in the market value of the company’s shares, but Ma remains confident of the company’s future, the report stated.

On January 23, Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch and Ephrat Livni wrote in DealBook’s newsletter that Jack Ma has largely disappeared from public view, but has been buying up Alibaba shares in recent months, as has Joe Tsai, his longtime business associate and the company’s chairman. Citing sources, the report suggests that Ma and Tsai believe the business is undervalued. Ma bought $50M worth of Hong Kong-traded stock in the quarter, according to a person with knowledge of the matter, who added that Tsai acquired about $151M worth of Alibaba’s U.S.-traded shares in Q4.

CONSENSUS: In terms of overall results for the December-end quarter, analysts are calling for Alibaba to report total revenue of $36.74B. The consensus Q3 earnings forecast stands at $2.69 per share. For the March-end quarter, analysts’ consensus currently calls for revenue of $31.04B and for Alibaba to post a profit of $1.73 per share, according to data from Refinitiv.

SENTIMENT: Check out recent Media Buzz Sentiment on Alibaba as measured by TipRanks.