With the recent euphoria easing over China’s reopening, shares of Alibaba Group Holding Ltd (BABA), China’s largest e-commerce company, have retreated nearly 16% and lost $46 billion of market value since posting a 7-month high last month. Falling earnings estimates for Alibaba suggest that the latest decline in the stock can continue. Earnings results that are due to be reported on Feb 25 will likely show the company’s revenue barely grew last quarter, testing investor optimism in the stock.
Since plunging to a 7-year low in October, shares of Alibaba have more than doubled to a 7-month high last month. Investors flocked to the stock hoping the company’s profits would soar after the Chinese economy reopened from Covid lockdowns. Alibaba Group Holding is seen as a proxy for China’s consumer spending. However, the recent decline in its share price underscores doubts over the strength of China’s economy as the reopening excitement cools.
Investors poured money into Alibaba on optimism about China’s reopening. Regulatory filings in the U.S. showed hedge funds boosted their Alibaba holdings by about 16 million shares in Q4, more than any other U.S.-listed stock during that period. However, sentiment toward Alibaba is shifting as options data show traders are increasing purchases of bearish contracts that benefit from share-price declines. The put-to-call ratio for Alibaba’s American Depositary Receipts (ADRs) has risen to levels last seen in October.
Long-term investors remain optimistic about Alibaba’s prospects with the company’s strong e-commerce foundation in logistics, payment, customer base, and the potential of its cloud business. Consensus target prices of analysts for the stock suggest a 40% gain in Alibaba’s share price over the next 12 months. However, the stock’s recent decline means it will take a positive earnings surprise to resume its uptrend.
Estimates compiled by Bloomberg show Alibaba’s revenue likely grew 1.4% last quarter from a year earlier, and cost-control efforts probably helped the company’s gross margin to rise to 39.2% from 36.7% in the previous quarter. Analysts' forward earnings-per-share estimates have fallen more than 6% from a December high. Asian and Greater China equities at BNP Paribas Asset Management said, “the next phase of the reopening rally will be driven by company fundamentals and macro recovery. We have yet to see earnings getting better, which is why the market has been quite volatile.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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