Alibaba: The Selling Has Intensified

Alibaba Group Holding Limited (NYSE:BABA) is slated to report its highly anticipated FQ3'23 earnings release on February 23. Investors will likely look to management for optimistic commentary following China's full reopening from COVID and a nascent consumption recovery underway.

However, investors need to note that China's economic recovery remains highly uncertain in H1'23, with more clarity in H2. In addition, China's dependence on its domestic economy for recovery will be critical, given the likely weakness in export markets.

Therefore, it has moved ahead to restart its industrial engine as consumer spending could remain tepid in the near term, given relatively low confidence. China's property market has also not emerged from its doldrums, as property developers still face "liquidity struggles."

However, with BABA having recovered more than 100% from its October lows toward its January highs, much is at stake for CEO Daniel Zhang and his team to prove as BABA's valuation normalized.

We also highlighted in our previous article cautioning investors about chasing the momentum spike, which seemed to be plateauing. As such, we aren't surprised that BABA has pulled back significantly from its January highs, even as investors have piled into Chinese stocks, hoping not to miss out on its surge.

With that in mind, we believe BABA is at a critical juncture as investors assess whether management could resume its guidance after pausing it previously due to macro and regulatory uncertainty.

The regulatory landscape has since improved significantly, even though Nikkei Asia published an op-ed highlighting that "tech regulation will never recover to the pre-2020 status quo, even though tech companies will enjoy a temporary reprieve."

As such, investors will need to be cautious about expecting Chinese President Xi Jinping to completely release the shackles on its Internet companies, returning them to unfettered growth mode.

Hence, even as China reopens for business with the world, it expects its domestic companies to behave appropriately. Xi stressed in a recent address to top officials that "China needs to create a path to modernization that is more efficient than capitalism and better safeguards social justice."

Hence, we believe the hyper-growth phase in domestic consumption is likely over for Alibaba and its Internet peers, behooving a strategic revamp of its growth vectors.

Recent reports indicate that China's declining population highlights structural growth impediments, requiring Alibaba to look outside China to spur growth.

Therefore, investors should be on the lookout for Alibaba's opportunities in the cloud computing space in Southeast Asia. In addition, keen investors should recall that CEO Daniel Zhang has assumed control of "Alibaba's important cloud division and [becoming] acting president of Alibaba Cloud Intelligence."

The company has also shifted its Alibaba Cloud's ex-China HQ to Singapore as it looks to expand its footprint in Southeast Asia, challenging the hegemony of the US hyperscalers.

WSJ reported that Alibaba and its peers mainly engage in price competition to convince companies to adopt their services, "[offering] prices that are 20% to 40% lower than American firms on different products."

However, it's a tall order to expect Alibaba to dislodge the market share of AWS (AMZN), Microsoft Azure (MSFT), and Google Cloud (GOOGL) (GOOG), which hold a combined share of 70% in Southeast Asia.

Furthermore, western companies based in Southeast Asia could also be concerned with geopolitical risks between the US and China, frayed recently by the spy balloon incident.

Despite that, Berkshire Hathaway's (BRK.A) (BRK.B) Vice Chairman Charlie Munger argued that "China is still a prime opportunity for investors despite geopolitical risks." He stressed that "investors can buy stronger Chinese companies at cheaper valuations than those in the US."

That thesis was bolstered recently by Scion Asset Management's Michael Burry, whose firm released filings showing new positions of 50K BABA shares added in CQ4'22, demonstrating his prescience.

Therefore, is the recent pullback an opportunity for investors who missed its October lows another chance to load up?

At an NTM EBITDA multiple of just 8.8x, BABA is not expensive, having pulled back closer to the two standard deviation zone under its 10Y average of 8.2x.

Hence, the market has likely priced in a much weak growth recovery phase for China's leading e-commerce company.

As such, we will look at Zhang's commentary on its recent forays into Southeast Asia as Alibaba looks to expand its cloud presence and market share to rejuvenate growth out of China.

While the pullback could continue as the bearish bets intensified recently, we believe it represents an opportunity for investors to start adding if they missed its October lows previously.

Rating: Buy (Revised from Hold).

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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