Chinese e-commerce giant Alibaba Group Holding Limited (BABA - Get Rating) doesn’t need any introduction. The holding company operates through Core Commerce, Cloud Computing, Digital Media and Entertainment, Innovation Initiatives, and other business segments.

The Chinese authorities have enforced strict regulations on its tech businesses over the past year to rein in the market manipulation power of some of its mega-companies. This triggered a massive sell-off in its tech stocks. BABA was subject to a fine of $2.80 billion following an anti-trust investigation by the Chinese authorities.

However, there have been speculations that the crackdown on the Chinese tech stocks will ease following signals from the country’s officials. As a result, BABA’s stock recovered from its lows. Goldman Sachs analysts said in a note, “We expect Alibaba’s market share loss to gradually stabilize and remain constructive on the company’s ability to expand its total addressable market.”

In the last reported quarter, BABA beat Street EPS estimates by 11.6% and revenue estimates by 2.3%. BABA’s earnings beat was attributed to the company’s cost-cutting and new business initiatives. Over the past week, Goldman Sachs and Citigroup have reinforced buy calls. The consensus estimate for BABA’s EPS for the next 12 months has climbed more than 7% from a three-year low in late May.

However, the company faces tough competition from JD.com Inc. (JD) and Pinduoduo Inc. (PDD). It also faces the risk of another lockdown as COVID-19 cases in Shanghai doubled in a day, keeping Chinese authorities on their toes to stamp out new outbreaks. The previous lockdowns led to substantial business losses and disrupted supply chains.

BABA’s stock has gained 0.2% in price year-to-date, while it has lost 43.7% over the past year to close the last trading session at $119.12.

Here’s what could influence BABA’s performance in the upcoming months:

Mixed Financials

BABA’s revenue increased 9% year-over-year to RMB204.05 billion ($30.40 billion) for the fourth quarter, which ended March 31, 2022. The company’s income from operations came in at RMB16.71 billion ($2.48 billion), compared to its loss from operations of RMB7.66 billion ($1.14 billion) in the year-ago period.

However, its adjusted EBITDA declined 22% year-over-year to RMB23.37 billion ($3.48 billion). Its non-GAAP net income fell 24% year-over-year to RMB19.79 billion ($2.94 billion). Also, its non-GAAP loss per share widened by 204% year-over-year to RMB0.76.

Mixed Analyst Estimates

BABA’s revenue for fiscal 2023 and 2024 is expected to increase 8.7% and 13.7% year-over-year to $137.60 billion and $156.56 billion, respectively. Its EPS for fiscal 2024 is expected to increase 19.1% year-over-year to $8.83. However, its EPS for fiscal 2023 is expected to decline 5.2% year-over-year to $7.41.

Stretched Valuation

In terms of forward non-GAAP P/E, BABA’s 16.24x is 48% higher than the 10.97x industry average. Likewise, its 2.15x forward EV/S is 102.9% higher than the 1.06x industry average. And the stock’s 2.34x forward P/S is 183.1% higher than the 0.82x industry average.

Mixed Profitability

In terms of trailing-12-month gross profit margin, BABA’s 36.76% is 0.7% higher than the 36.51% industry average. Its 15.74% trailing-12-month EBITDA margin is 29.9% higher than the industry average of 12.11%.

However, its trailing-12-month 6.57% Return on Common Equity is 61.2% lower than the 16.95% industry average. Furthermore, the stock’s 0.50% trailing-12-month asset turnover ratio is 50.6% lower than the industry average of 1.02%.

POWR Ratings Reflect Uncertainty

BABA has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. BABA has a C grade for Quality, in sync with its mixed profitability.

The stock is currently trading above its 50-day moving average of $98.72 but below its 200-day moving average of $121.24, justifying its C grade for Momentum.

BABA is ranked #23 out of 42 stocks in the China industry. Click here to access BABA’s Growth, Value, Stability, and Sentiment ratings.

Bottom Line

Analysts have reinforced ‘Buy’ calls for BABA as speculation of easing the Chinese crackdown on tech stocks are expected to boost the company’s performance.

However, the company faces increased competition from its rivals, and the recent uptick in COVID-19 cases has given rise to lockdown fears. Moreover, the stock is currently trading at a stretched valuation. So, it could be wise to wait for a better entry point in the stock.

How Does Alibaba Group Holding Limited (BABA) Stack Up Against its Peers?

While BABA has an overall POWR Rating of C, you might want to consider investing in the following China stocks with a B (Buy) rating: NetEase, Inc. (NTES - Get Rating), FinVolution Group (FINV - Get Rating), and China Automotive Systems, Inc. (CAAS - Get Rating).

BABA shares were trading at $120.54 per share on Thursday morning, up $1.42 (+1.19%). Year-to-date, BABA has gained 1.47%, versus a -18.33% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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