Robert Way
Alibaba Group Holding Limited (NYSE:BABA) investors have been dealt another massive blow, despite the initial optimism from its recent first-quarter or Q1FY2024 earnings release.
As such, the initial post-earnings surge has completely dissipated. The battering has resulted in BABA falling back toward levels last seen in early July. The recent property market crisis engulfing China’s leading property developers has intensified the risk-off sentiments in the market.
As a reminder, China Evergrande Group (OTC:EGRNF) has filed for Chapter 15 bankruptcy, “pursuing approval from a US court for restructuring over $19 billion in offshore debts.” The untimely development came amid the recent Country Garden Holdings (OTCPK:CTRYF) distress, as it “expects to report its worst loss since becoming a public company 16 years ago.”
As such, investors’ sentiments in Chinese stocks have turned from bad to worse, despite a surprisingly solid earnings report from Alibaba for FQ1. As such, fund managers are reportedly bracing themselves for a negative spiral in the Chinese economy, anticipating a “significant economic slowdown.” They are also expected to reassess companies in their portfolio with “ties to the Chinese economy.”
As such, despite a relatively upbeat report underscoring a bright spot in Chinese consumer spending at the box office, I assessed that investors are likely preparing for the worse. Economists have started to turn pessimistic, believing China could miss its 5% GDP growth target this year. It’s a dramatic reversal from their initial post-COVID reopening optimism, as they penciled in a more robust recovery than the official estimates.
Despite that, the government remains committed to meeting its full-year target, even though investors have likely priced in potential underperformance, given the recent developments.
The carnage in China’s property market has seen little signs of a sustained recovery as the initial uplift reversed. Therefore, I believe it’s justified for investors to feel increasingly worried, as the window for the authorities to implement more effective stimulus measures is closing.
Despite that, investors shouldn’t ignore Alibaba’s remarkable performance in FQ1 that justified BABA’s long-term bottoming in October 2022. As a reminder, Alibaba saw broad-based revenue growth across its key business segments. It also posted more robust adjusted EBITDA profitability, which increased more than 26% YoY, based on a margin of 22.2%. As such, it corroborates my conviction that Alibaba’s wide-moat business model is well-positioned to ride out China’s bumpy road to recovery, as I expect the worst to be over.
Notwithstanding my optimism, Alibaba Bears would likely point out that Alibaba is a proxy for Chinese consumers, given its scale. Coupled with the vital role of China’s property market in supporting consumer spending and sentiments, BABA could be badly affected by the recent adverse developments.
While that makes sense, I must reiterate that BABA has already dropped back toward its early July lows as risk-off selling battered Chinese stocks. With that in mind, I believe it’s opportune to assess whether my Strong Buy rating could still be supported based on its current price action.
BABA price chart (weekly) (TradingView)
My assessment suggests buyers have not returned after BABA topped out in early August (pre-earnings). Last week’s steep selloff has yet to trigger a capitulation signal, indicating that we could see further downside volatility for the market to squeeze more holders out before potentially consolidating.
It’s my thesis that BABA’s April and June 2023 lows should hold robustly at the $78 level. Buyers must defend that line to maintain the higher low market structure supporting BABA’s long-term bottom in October 2022.
In other words, more conservative investors can await a potential re-test of BABA’s June lows before returning, especially if they already have heavy exposure.
However, it’s also critical to consider that BABA buyers might stem the recent slide without allowing the negative sentiments to reach that level before reversing. Given the recent steep pullback, I view the current levels as constructive to maintain my Strong Buy thesis.
Alibaba’s broad recovery across all its segments has proffered me even greater confidence that it’s well-primed to lead the market recovery when China’s economic doldrums get sorted out. Its competitive advantages are expected to provide it with substantial firepower to leverage its international growth drivers while riding the cloud computing boom underpinned by Generative AI.
However, investors adding here must remain patient for its recovery, as the coast is not clear. However, if you want to wait for absolute clarity before returning, the risk/reward level is not expected to be as attractive, as the market is forward-looking.
Rating: Maintain Strong Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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