Alibaba Stock: Maintaining Buy Rating, Upside Set For 2024

We're maintaining our buy-rating on Alibaba Group Holding Limited (NYSE:BABA) stock ahead of earnings scheduled for around November 17th. While we recognize we may be early with our bullish sentiment, we see attractive entry points in the near term. We're already seeing positive signs of recovery; this week, China's National Bureau of Statistics reported an economic expansion of 1.3% on a quarterly basis for the third quarter; we're seeing a momentum uptick after a growth of 0.5% in the April to June period. China's GDP grew 4.9% in the third quarter, outpacing market expectations.

We expect Alibaba's top line growth to reaccelerate in 2024 and believe that most of the macro headwinds relating to the slower-than-expected China recovery have been priced into the stock. Alibaba's stock is down ~11% over the past six months, underperforming the S&P 500 (SP500) by around 15%. In addition, Alibaba is down 13% during the past quarter, underperforming the S&P 500 by about 10%. We think there remains some near-term pain for BABA stock but expect the company's financial model to have more leverage to balance the storm until China's economic growth reaccelerates more meaningfully.

We think China's better-than-expected economic growth signals that the government's stimulus efforts are working, but we're still cautious about forecasting outperformance in the near-term due to the uncertain macro environment and heating tensions between the U.S. and China. Our bullish sentiment is informed by our belief that Alibaba's e-commerce-related sales, accounting for the bulk of total sales, will experience a material revenue uplift as China's economy recovers. Alibaba's Taobao and Tmall Group and International Digital Commerce Group are well positioned to experience a reacceleration of revenue as global consumer spending picks up towards 2H24. China's economic slowdown has been weighing on the company's top line growth, but we think the worst is in the rearview mirror, with Alibaba's revenue growth Y/Y expanding to the double-digit range this quarter.

We think the company's International Digital Commerce division is gaining more traction; the division reported 41% Y/Y growth in the June quarter. While Alibaba faces increased competition with Amazon (AMZN) on the international scale, we think Alibaba's competitive edge is improving toward 2025.

Additionally, we think cloud spending should reaccelerate toward mid-2024, and we see longer-term artificial intelligence ("A.I.") tailwinds, as we're only in the early stages of the A.I. cycle. The company is gaining more ground in its cloud computing capabilities in spite of the softer cloud spend environment weighing on service providers; Microsoft (MSFT) Azure's slower growth last quarter and outlook for this quarter reaffirms the weaker spending environment. We think the optimization cycle should be complete by the end of 2023 and see a clearer path of revenue growth for Alibaba's cloud unit toward 2H24.

Valuation & Word on Wall Street

Wall Street shares our bullish sentiment on the stock. Of the 47 analysts covering the stock, 43 are buy-rated, and the remaining are sell-rated. The stock is currently priced around $83 per share. The median sell-side price target is $141, while the mean is $139, with a potential 68-70% upside.

We think the stock is relatively undervalued at current levels; the stock is trading at EV/Sales of 1.38x for revenue for the trailing twelve months (TTM). We continue to see some near-term headwinds due to macro uncertainty, but we believe Alibaba will be relatively resilient into 2024. The following outlines sell-side ratings and price-targets for the stock.

What to do with the stock

We remain buy-rated on Alibaba. We continue to see some near-term hurdles, but we expect Alibaba to outperform expectations in 2024 driven by Chinese economic recovery - China reported its GDP grew 4.9% Y/Y in the third quarter, ahead of market consensus. We see a clearer path to Alibaba's e-commerce sales, driving top-line growth in 2024. We recommend investors explore entry points in Alibaba Group Holding Limited stock ahead of demand recovery in 2024.

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.

Our investing group, Tech Contrarians, discussed this idea in more depth alongside the broader industry and macro trends. We cover the tech industry from the industry-first approach, sifting through market noise to capture outperformers. 

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