Source: Barron Weekly Author: Jack Denton
Alibaba's valuations are still cheap, but low growth and increased competition are two major concerns.
On Tuesday (6/27), analysts at the investment research institute Bernstein (Bernstein) downgraded$Alibaba (BABA.US)$According to the stock ratings, they believe there is a potential “value trap” risk for the Chinese tech giant's stock. However, this news did not affect Alibaba's rise. On Tuesday, the company's US stock closed up 1.94% to $87.13.
Many Wall Street analysts are bullish on Alibaba. One reason is that the stock price is too cheap. Strictly regulated, from$JD.com (JD.US)$with$PDD Holdings (PDD.US)$Alibaba's market value has dropped by more than 70% since the end of 2020 due to factors such as increased competition from companies and the slowdown in China's economy due to the pandemic. But Bernstein's team of analysts seemed to have a different opinion.
A team of Bernstein analysts led by Robin Zhu (Robin Zhu) lowered Alibaba's target price from $130 to $98 on Monday, downgrading its rating from “outperforming the market” to “in line with the market.”
Bernstein initially predicted that Alibaba's GMV growth would improve in the second quarter, but analysts wrote in the research report that feedback from merchants on Alibaba's e-commerce platform still indicates “weak marketing spending.”
Zhu's team pointed out that from now on, the next quarter's growth may not be particularly significant, and the risk of a “value trap” has increased as a result. A “value trap” refers to a stock that is cheap in terms of valuation, but there is a risk that the stock price will stagnate or fall further.
The analysts wrote, “We raised Alibaba's stock rating a year ago because stocks absorbed long-term low growth expectations at the time. Furthermore, the increase in consumer spending brought about by the reopening of the Chinese economy supported Alibaba's growth. Since then, Alibaba's stock price has fluctuated in the range... Although valuations are still very low, long-term low growth no longer makes us think that a bearish stance on this stock may be too aggressive.”
Increased competition in the industry is another concern for Bernstein analysts. They wrote, “If competition issues in the core e-commerce sector are not resolved, we believe that low price-earnings ratios and moderate earnings per share growth may not be enough to drive stock prices to continue rising.”
Overall, however, Wall Street analysts are generally bullish on Alibaba. Earlier this year, Alibaba announced a spin-off plan, including spin-off its high-growth cloud computing business to create value for shareholders. The average rating of Alibaba's stock by more than 50 analysts surveyed by FactSet is still “buy”. The average target price means that the stock price has room to rise by nearly 60% from the current level.
edit/lambor