Alibaba: Could This Be The Year Of The Dragon

Key Points

• This morning's earnings easily beat analyst expectations. 
• Macro headwinds remain, which are weighing on shares. 
• But the longer-term risk/reward setup has never been stronger.  

Though shares have cooled somewhat since the stock's 100% rally in Q1, Alibaba Group Holding Ltd NYSE: BABA is at an exciting point in its growth journey. Having endured a brutal two years through last November, their shares have been admirably treading water since then and are now looking more and more likely to start trending north. 

The headwinds the Chinese e-commerce giant has had to navigate are well known by now; regulatory crackdowns from Beijing, delisting fears in New York, and a slowing global economy to take just a few. But they're still trading up more than 50% from last November's low, which was only a few cents above 2016's all-time low, and the outlook is looking quite bright. Even though many of the headwinds mentioned above have yet to dissipate fully, there's a growing sense that Alibaba is a sleeping giant that could soon be waking up. Let's jump in and see what's behind that argument. 

For starters, the company released its Q4 earnings this morning, which came in well ahead of analyst expectations. Non-GAAP EPS was 15% higher than the consensus, while revenue for the quarter managed to grow 2% year on year. In his address to shareholders, the group's CEO, Daniel Zhang, highlighted the company's proactive approach to adapting to the ever-changing business landscape. Zhang specifically emphasized the organization's commitment to enhancing competitiveness by fostering greater independence and catering to the diverse needs of customers while capitalizing on emerging opportunities.

Strategic Moves

One of the most tangible examples of this was news of the company's decision to spin off the Cloud Intelligence Group via a stock dividend distribution to shareholders, the intention being for it to become a publicly listed company in its own right. Considering the 80% drop that shares had to endure over the past two years, strategic moves like this should be seen as a breath of fresh air for investors keen to see some action. For all that, though, the initial reaction from the stock was fairly muted, if not mildly bearish. In the first few hours of Thursday's session, Alibaba shares were trading down 5%, trimming the 15% rally they'd logged over the past week. 

Perhaps the results weren't as much of a blowout as the more optimistic investors had been hoping for, but the fact is they were better than expected, and Alibaba shares are still trading at 2014 levels. To be fair, several of the bigger Chinese stocks listed in the U.S. have been suffering this month. PDD Holdings Inc's NYSE: PDD shares are down 40% since the end of January, a slump reflected more broadly in the Invesco Golden Dragon China ETF NASDAQ: PGJ, which is down 20% in the same timeframe.

There's also a good chance that last week's update from the U.S. Public Company Accounting Oversight Board is continuing to weigh on them despite the upside beat. The watchdog released a statement saying they'd identified several issues with audits performed by the likes of KPMG in China. Just as investors had been starting to think the delisting risk was at its nadir, this has brought it right back to the forefront. 

Getting Involved 

Still, that risk didn't stop Daniel Loeb's Third Point hedge fund from initiating a 1.3 million share position in Alibaba stock last quarter. Shares have, at best, traded sideways since then, so investors considering getting involved now have both Loeb's position and this morning's earnings beat, reinforcing an entry point. You can't help but feel that Alibaba is being dragged down by only marginally related risks, and should these be alleviated in the coming months, then shares will find it much easier to start trending up. 

While its revenue isn't growing by double-digit percentages like it was for most of 2020 through 2021, it's still coming in close to record highs, while Alibaba's addressable market has never been bigger. Unless you firmly believe that the stock will be delisted, then the longer-term risk/reward setup here feels too good to miss.