Alibaba’s shares (NYSE: BABA) declined almost 3% last Friday after the Chinese e-commerce giant slashed its full-year sales forecast due to worries over the economic impact of a US-China trade war, which the company expects to erode revenue ahead of its peak sales period. However, yesterday the stock recovered to close at 147.44, up 1.94% or $2.80 from the prior close.
Yesterday, the company received numerous price-target cuts due to worries about slower revenue growth, the effect of updating the website, and how aggressive investments could decrease profit margins. Still, we expect the stock to remain range-bound with a mild bullish bias based on the details provided underneath.
Alibaba Stock: Softening Spending & Investing Heavily
Alibaba Group Holding Limited generated earnings of USD 1.40 per share in the second quarter of fiscal 2019, exceeding Zacks’ consensus estimate by 28 cents. Earnings also rose by 14.8% year-on-year. The company generated sales of RMB 85.15 billion (USD 12.4 billion), an increase of 54% over the prior-year quarter.
The year-over-year increase in revenue was driven by the strength of the China retail trade business, the consolidation of Ele.me and Cainiao Network, and the strong growth in Alibaba Cloud revenue.
However, their revenues fell short of the Zacks consensus estimate of 12.65 billion dollars. The pro forma gross margin was 45.1%, down 1,500 basis points from the prior year.
In particular, the company has reduced its forecast annual revenue target by a range of 4% to 6% – from RMB 375 billion to RMB 383 billion. In addition, the company fell short of market expectations, with the second quarter 2019 revenues of RMB 85.15 billion ($12.4 billion) slightly below the consensus estimate of RMB 86.7 billion.
To the credit of the company, Q2 earnings per share of 9.60 yuan ($1.40) exceeded the expected 7.43 yuan on the street. As a response, SunTrust’s top analyst Youssef Squali reiterated a “Buy” rating on Alibaba stock, while lowering the price target to $180 (from $195), which represents a potential upside of 21% from the last close.
According to TipRanks, which quantifies analysts’ and bloggers’ hit rate based on how the calls work out, analyst Youssef Squali has a yearly average return of 19.2% and a 66% victory rate. Squali has a 16.2% average return when suggesting BABA, and is positioned #69 out of 4908 analysts.
In a note to clients, Squali wrote, “We maintain a Buy and a bullish LT thesis on BABA, but lower our estimates/ PT to $180 from $195 on greater macro uncertainty, and mgmt’s ensuing decision to postpone monetization of incremental inventory from the new recommendation feed to protect merchants’ ROI. Core commerce growth remains strong, enjoying market share gains and stable margins to fund new initiatives. Additional downside risk to growth and margins exists if the macro worsens, but BABA’s dominant position online, growing/diversified offering and China’s on-going consumption upgrade/digitization should help BABA outperform.”
Similarly, Baird analyst Colin Sebastian trimmed his price target on Alibaba stock to 178 from 215. Also KeyBanc Capital Markets analyst Hans Chung cutback his price target on Alibaba stock to 203 from 215.
Sebastian, however, left the outperform rating unchanged. The downward revision of the price target follows Alibaba’s quarterly results that missed analysts’ revenue estimates. Alibaba limited its full-year revenue growth outlook by 4% to 6% in the midst of “fluid macro-economic conditions.”
Though Alibaba’s main e-commerce business continues to remain strong, according to Sebastian, a downwardly revised revenue outlook reflected slowing customer spending in China. There also was an associated setback in monetization due to an overhaul of its Taobao Marketplace, which is a consumer-to-consumer e-commerce portal and the leading online shopping site in China.
In his note to clients, Sebastian wrote: “We are correspondingly lowering our 12-month price target, although we view the long-term growth potential of the business as intact.”
Alibaba held a two-day investor conference in September. Its executives said the opportunity is huge for its core e-commerce business as well as its retail, digital media, and cloud-computing services.
He also referred to the pressure on margins from recent growth initiatives as reasons for the price target reduction. Alibaba invests heavily in physical businesses, digital media, cloud computing, and logistics entertainment. The reasons for this were China’s economy and the new transition from Taobao. However, he held a rating of overweight.
Chinese Internet companies have a somewhat negative attitude due to regulatory, economic, and yuan exchange rate concerns. Last month, Alibaba held a two-day investor conference. The executives said the opportunities were tremendous for the core e-commerce business as well as for retail, cloud computing, and digital media services.
It can be noted that the price targets are still higher than the current traded price. As a result, we can expect the stock to move up gradually.
Technically, the stock has started rising after testing the support at $146 levels. The rising stochastic indicator also confirms underlying bullishness in the stock. So an increase in the stock’s price can be expected.
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