For China’s internet giant Alibaba, weakening consumer behavior and the crackdown on China’s authorities are becoming a burden. Most recently, the group recorded measly growth by its standards. The decline of Chinese tech stocks and Alibaba’s is also continuing on the stock exchange – and there is no end in sight. What’s going on at Alibaba, what the stock is doing, and what analysts are saying.
That’s what’s going on at Alibaba
Alibaba makes the lion’s share of its business with e-commerce platforms for the Chinese market, and business has been good for a long time. In 2020, according to a report by the United Nations, Alibaba was the largest online trading platform in the world, ahead of Amazon. Like its US competitor, Alibaba also operates a cloud business, which, however, yields significantly less. That is why the group recently focused on this division. In both divisions, Alibaba benefited from the increasing digitization.
The Huangzhou-based group is also active in the payment processing business through its billion-dollar stake in the Ant Group, whose IPO planned for last year failed due to resistance from Chinese supervisors. In the final quarter of the 2020/21 financial year (March 31, 2021), the company managed by Daniel Zhang increased its sales with this mix by almost two thirds. But then Alibaba came into the focus of Chinese authorities.
However, the wind began to shift as early as autumn 2020. At the time, Alibaba founder Jack Ma gave a momentous speech in which he criticized the country’s state-bank-dominated financial sector as outdated and backward. The unusually bold attack meant that the Ant Group’s IPO suddenly had to be called off.
Since then, Beijing’s regulators have been taking on one sector after the next and passing reforms that gradually undermined the Alibaba Group’s business model – such as making online lending more difficult for the Ant Group. In response, Chinese tech companies are suddenly in a hurry to donate their money to charities in China. The Xiaomi founder, Pinduoduo, Tencent and Alibaba all donated billions.
Most recently, the misery was expressed in numbers at the end of February. Sales in the third business quarter, which ran until the end of December, rose by almost ten percent. It was the weakest growth since the IPO and looks almost paltry compared to the pre-Beijing crackdown, when increases of more than 40 percent were common. For the financial year as a whole, the management around CEO Daniel Zhang still expects sales growth of 20 to 23 percent.
And Beijing’s crackdown on Alibaba doesn’t appear to be over yet. State-owned banks should once again put their business relationships with the Ant Group to the test, as the Bloomberg news agency recently reported with reference to people familiar with the matter. That could be the next serious setback for Alibaba’s profit maker.
That’s what analysts say
In a recent study, the analysts at the US bank JPMorgan identify several risks for papers in the Chinese Internet sector: geopolitical tensions, economic developments and the crackdown on the Chinese authorities. On a six to twelve month horizon, they advise investors not to bet on the sector. The experts assume that investors will only regain confidence in certain values in the longer term. Alibaba downgraded JPMorgen analyst Alex Yao by two notches to “Underweight” – lowering the target price from $180 to $65.
“The golden age of the Chinese Internet is probably already behind us,” says analyst Jessica Tea from the major French bank BNP Paribas. A tough verdict, but in fact, Alibaba’s competition is also looking bleak: Internet giant Tencent is likely to report the biggest profit slump in its history this month, while JD.com also had to report a sharp drop in profits. And earnings expectations for the industry could well fall further, believes Morgan Stanley analyst Laura Wang.
“We still don’t see the optically low valuation as a historic buying opportunity, but as an expression of the regulatory, macroeconomic and now also fundamental risks,” writes analyst Manuel Mühl from DZ Bank with a view to Alibaba towards the end of February.
Basically, Alibaba is well positioned to benefit from the growing internet affinity in China, according to Mühl. However, the group is one of the first “victims” of the Chinese regulatory offensive, which continues to intervene in companies. The expert has lowered his price target by $30 to $100 and recommends selling the shares.
Mühl is almost alone with his pessimistic outlook. Among the 60 analysts recorded by the Bloomberg news agency, he is the only one, alongside JPMorgan expert Alex Yao, who recommends selling the share – most of them apparently see the price low as an opportunity to get started. The average price target is also well above the current price at around 170 US dollars. However, the range goes from 65 to 309 US dollars. (dpa)