The recent developments surrounding Alibaba Group Holding Ltd. have captured significant attention, following the company’s decision to abandon its plans for the spin-off and IPO of its cloud computing division. This announcement, which coincided with the release of its quarterly earnings last Thursday, prompted a 10% drop in Alibaba’s share price. The reaction from Wall Street analysts has been varied, with some expressing concern over the strategic direction of the company, while others maintain a positive outlook.
JPMorgan
JPMorgan analysts pointed out concerns related to Alibaba’s cloud business not meeting growth expectations and a slight decline in its core business, which might cause investor fear. While they recognised the positive aspect of the newly announced dividend, JPMorgan suggested that it might not suffice to mitigate the disappointment from the aborted cloud spinoff plan. The firm has set a price target of $150 on Alibaba’s U.S. listed stock, which represents a considerable 93% upside potential.
Morgan Stanley
Morgan Stanley took immediate action in response to Alibaba’s announcement, withdrawing its endorsement of Alibaba as its top pick in the internet sector. This decision was driven by multiple factors, primarily the unexpected cancellation of the cloud computing IPO, which Morgan Stanley perceived as a significant alteration to its investment thesis. The bank’s analysts, led by Gary Yu, emphasised the uncertainty surrounding the recovery of consumer spending and the reacceleration of cloud services, coupled with the reversal of the cloud spin-off plan. Despite these concerns, Morgan Stanley still maintains an overweight rating on Alibaba’s stock but has reduced its price target from $125 to $110, indicating a 42% increase for Alibaba’s U.S.-listed shares.
Barclays
Barclays presented a more optimistic assessment. The bank suggested that Alibaba’s decision to forego the cloud IPO could be good, given the regulatory uncertainties. While acknowledging that the IPO cancellation might disappoint investors looking for a near-term catalyst for value, Barclays highlighted Alibaba’s share repurchase program, with $3 billion bought back in the past four months, and the introduction of $2.5 billion in annual dividends. Barclays reiterated its overweight rating on Alibaba’s stock and maintained a price target of $138, pointing to the potential attractiveness of the stock for long-term investors due to the new focus on dividends and buybacks.
Our take:
Several factors underpin the optimistic outlook for Alibaba. Firstly, the company boasts a strong history of revenue growth, having reported a 23% increase year-over-year in its most recent quarter. Additionally, Alibaba’s significant presence in China’s rapidly expanding e-commerce market, where it holds over 50% market share, makes it a leader in the sector. Beyond e-commerce, Alibaba’s investments in cloud computing and other digital ventures diversifies its revenue streams, mitigating risks and opening avenues for further expansion.
However, there are also certain risks that need to be considered. Regulatory challenges are a constant in Alibaba’s highly controlled operating environment, with new regulations potentially impacting the company’s operations and especially unexpected decisions by the Chinese communist party (CCP), similar to the ones taken in regard to its former CEO Jack Ma, who no longer leads the company. Competition is fierce, particularly from other major Chinese e-commerce entities like JD.com and Pinduoduo. Lastly, the slowing pace of China’s economy could pose a threat to Alibaba’s business performance.
Despite the high hopes, the CCP and its regulations might hurt what is a good business.
Ivailo Chaushev,
Chief Market Analyst
Risk warning:
This article is for information purposes only. It does not post a buy or sell recommendation for any of the financial instruments herein analysed.
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