Alibaba’s US$46 billion wipe-out tests investor support

AFTER months of exhilarating gains as hedge funds piled in and analysts upgraded target prices, Alibaba Group Holding’s stock is losing steam and leading the decline in Chinese technology shares. 

Rising bearish bets on the e-commerce giant’s stock and falling earnings estimates suggest that the slide could continue, even after a US$46 billion wipe-out over the past three weeks. Quarterly earnings due next Thursday (Feb 23) will likely show just slight growth in revenue. The three-month period was marred by the reopening of China’s economy, with Alibaba focusing on cost-cutting rather than business expansion. 

Chelsey Tam, equity analyst at Morningstar Asia, said: “The rally in share prices has been huge, and there’s some profit-taking now going into earnings.” Investors will want to see how Alibaba’s management judges the speed of recovery, she added. 

Alibaba’s share price has been seen as a proxy for China’s mass consumption. The decline underscores doubts about the strength of the economy, as excitement over the reopening cools. While pent-up demand and a stabilising regulatory environment will offer support, sceptics say much of the recovery outlook has been baked in, with few surprises for the sector expected from the National People’s Congress in March.

Investors could not get enough of Alibaba during the reopening rally, which saw its American depositary receipts surging about 90 per cent in the three months ended Jan 26. Regulatory filings in the US showed that hedge funds boosted their Alibaba holdings more than any other US-listed stocks last quarter.

At the same time, options data showed that traders could be increasing their purchases of bearish contracts that benefit from further declines, with the put-to-call ratio for Alibaba’s US shares picking up to levels last seen in October 2022.

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A majority of market participants expressed faith in the company’s longer-term outlook, with its strong e-commerce foundations in logistics, payment and consumer base, as well as the potential of its cloud business. Consensus target prices suggested a 40 per cent gain in share prices over the next 12 months.

For now, it would take a healthy dose of policy and earnings surprises for the stock to resume its uptrend.

Estimates compiled by Bloomberg showed that Alibaba’s revenue likely grew 1.4 per cent last quarter from a year earlier, a far cry from the days of heady expansion. Cost-control efforts probably helped its gross margin to rise to 39.2 per cent, from 36.7 per cent the previous quarter. Analysts’ forward earnings-per-share estimates fell more than 6 per cent from a December high. 

The tech giant is curtailing its global expansion ambitions, increasingly focusing on core areas such as online shopping and cloud-computing services. A source said that it sold off the last of its shares in Indian fintech giant Paytm last week, accelerating a withdrawal from the world’s fastest-growing mobile and internet arena.

Minyue Liu, investment specialist for Asian and Greater China equities at BNP Paribas Asset Management, said: “The next phase of the reopening rally will be driven by company fundamentals and macro recovery. We have yet to see earnings getting better, which is why the market has been quite volatile.”

Even after last year’s brutal sell-offs, the relative level of US tech stocks still looks elevated on a long-term basis. The Nasdaq 100 Index is not far off from historic highs against the S&P 500 Index; it is also still trading near the peak that marked the implosion of the dotcom bubble.

The tech-heavy gauge slumped 33 per cent last year in the worst crash since the 2008 global financial crisis. But it rallied 14 per cent in the first weeks of 2023 on optimism that the Federal Reserve would slow the pace of rate hikes. BLOOMBERG