Alibaba: Repeat Strong Buy – $160 Price Target (NYSE: BABA)

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Investment thesis

Alibaba Group Holding Limited (NYSE: BABA) recently released a better-than-expected FQ4’22 earnings release. We anticipated a relatively easy beat in our pre-earnings article (Strong Buy), as the street turned even more pessimistic. Nonetheless, management declined to provide its usual guidance for FY23 given the evolving situation surrounding COVID lockdowns in China.

However, BABA stock jumped post earnings as our analysis of price action suggested the stock had already bottomed in March. Management is also optimistic about continued support from the Chinese government, giving credence to its potential recovery in FY23-24.

As such, we reiterate our strong buy rating on BABA stock. We also discuss tactical price targets (PT) to watch in the short to medium term. Our medium-term PT of $160 suggests an implied upside of 71% from Friday’s (May 27) close.

Lack of guidance for FY23 didn’t worry the market

Alibaba Revenue Change % and Adjusted EBIT Margins % Consensus Estimates

Alibaba Revenue Change % and Adjusted EBIT Margins % Consensus Estimates (S&P Cap IQ)

Alibaba reported revenue growth of 8.9% in the fourth quarter, compared to 9.7% in the third quarter. Notably, investors should expect Alibaba to record revenue growth of just 0.7% in the first quarter of 2023 (quarter ending June), given the significant impact of lockdowns in China. . However, management pointed out that they started to see marked improvements in May. He articulated (edited):

The situation in May, with the resumption of express deliveries and with the beginning of the normalization of the situation in Shanghai, certainly, we see things improving. But it will take time for all remaining packages to be delivered and also for merchants to prepare for the upcoming 618 festival. But we are definitely seeing signs of improvement in early May. (Alibaba FQ4’22 Earnings Call)

However, management did not provide Street analysts with data points to model for FY23. But we believe the base case is still bullish for its revenue growth estimates of 0.7% (30 purchases out of 40 reviews). Nevertheless, we believe that Alibaba could surprise on the upside again in the first quarter. Note that the company has already started presales for its 618 buy event ahead of the start of the first wave of buys on May 31. We believe that event 618 would be a critical time to gauge the pace of consumer discretionary spending recovery, assuming the lockdowns in China do not worsen.

Additionally, management remains optimistic that a favorable regulatory environment could support Alibaba’s recovery in FY23-24. CEO Daniel Zhang explained (edited):

We have seen that the government has introduced various policies in recent times, aimed at stabilizing the economy, stabilizing employment and ensuring the supply of essential goods to the people. The State Council also convened an important meeting to implement measures in six different areas, several of which are highly relevant to Alibaba’s business, including boosting consumption, ensuring the supply of essential commodities and supply chain recovery. All of this is very relevant to us. (Alibaba earnings)

Focus on cost optimization could significantly increase EPS

Alibaba Adjusted EPS & Adjusted Net Margins % Consensus Estimates

Alibaba Adjusted EPS & Adjusted Net Margins % Consensus Estimates (S&P Cap IQ)

With a much slower growth climate, investors shouldn’t expect the gangbuster growth of previous years. Alibaba’s 10-year revenue CAGR of 45.5% and 10-year average EBIT margins of 26.4% are a thing of the past. Going forward, investors must accept much slower growth and lower profitability. This should explain why BABA shares have been significantly beaten over the past 18 months. The market has it all figured out. He assessed these headwinds shrewdly well in advance.

Therefore, management will focus on optimizing costs and improving operational efficiency. We believe it’s critical to help lift Alibaba’s EPS estimates and net margins from their nadir in FY23-24.

Notably, consensus estimates suggest the Street is confident that Alibaba’s battered profitability could recover remarkably in FY23, despite slowing revenue growth as noted above. Its adjusted net margins are also expected to bottom out in Q4’22 before improving significantly in FY23-24.

Price action remains very constructive from a low

BABA Price Chart

BABA Price Chart (TradingView)

Investors are encouraged to refer to our previous article for a more detailed discussion of the strategic analysis of BABA’s stock price action. This article will focus on a more tactical framework to help investors visualize PTs going forward.

Despite recent headwinds, BABA stock continued to maintain its March sellout signal. Moreover, the latest warning from the US SEC on the absence of a significant consensus around the delisting did not disturb the market. Moreover, the lack of guidance for FY23 did not worry investors.

Therefore, we are confident that its March low should hold. We also saw the March low in the price action of the KraneShares CSI China Internet ETF (KWEB) which we discussed in a recent article.

Our short-term PT of $120 sees the stock test and break above its “short-term resistance 1” before coming under more selling pressure at the $130 resistance level. More conservative results may consider relaxing some exposure to PT in the short term.

Our medium-term PT of $160 (implied 71% upside) sees the stock retesting its “intermediate resistance” level of $180. We expect the stock to come under much greater selling pressure at this level. Therefore, we encourage investors to reduce their exposure further in order to protect their gains. Going forward, we will have a clearer picture of the price action.

Therefore, we reiterate our strong buy rating on the BABA sharewith a mid-term PT of $160.

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