Alibaba Group: Rallying on Fundamentals & Improved Macro Backdrop

Chinese tech stocks such as Alibaba Group NYSE: BABA have faced a number of headwinds recently that have negatively affected the companies' stock prices. These headwinds include regulatory pressures and China’s links with Russia. The Hang Seng China Enterprises index which tracks Chinese shares traded in Hong Kong is currently down 9.42% YTD, with tech giants Alibaba Group and Tencent Holdings leading the decline. Adding to the uncertainty around Chinese tech stocks is the fear of additional US sanctions. Despite these fears, Alibaba Group is performing well on its fundamentals, and some analysts are taking a bullish stance on the company due to these factors.

Alibaba Group’s Fundamentals

Alibaba Group is currently down 19.74% YTD and trades 49% below the MarketBeat consensus price target. Since the company is severely underperforming analysts’ expectations, this could be seen as the company is undervalued at its current levels. Some investors took note of this as shares for the company increased 15% after it posted its earnings results for Q4 FY 2022 showing that it convincingly beat revenue and earnings estimates. The company finished Q4 with a non-GAAP EPDAS of RMB7.95, beating it by RMB0.78, and revenues of RMB204.05B, beating it by RMB4.62B, for 8.9% YoY growth.

When moving down to the company’s operating segments we can see where the strength of the company is. Alibaba Group’s e-commerce segment, which contributes to 69% of the company’s total revenues is going strong. Revenues from this segment grew 8% YoY to 140.3B Chinese Yuan. The company also added 28M new e-commerce users to its platform and arrived at a total of 1.3 billion active customer accounts.

One thing to note about Alibaba’s fundamentals is that it declined to give revenue guidance for the rest of this year. Executives at the company stated that COVID-19’s resurgence in China presents considerable risks and uncertainties that hinder its ability to accurately predict its performance in the near future. The company still predicts healthy operating cash flow throughout FY 2022 regardless.

China’s Crackdown on Tech Stocks is Easing

Tech stocks in China have been hit hard since 2020 due to the Chinese government’s initiatives to reign in their power, but this is now showing signs of easing. Government officials recently met with leaders in the Chinese tech sector to reduce tensions and stop the violent sell-off of these companies by overseas investors. Following the meeting analysts at JPMorgan upgraded the ratings of several Chinese internet firms including Alibaba from underweight to overweight. This means that analysts expect that these shares will outperform the average total return over the next six to twelve months.

Alibaba Group Repurchases Shares

Adding to the story that Alibaba Group is undervalued at its current levels, the company made the announcement that it will increase the number of shares bought back in its share repurchasing program.  Alibaba Group has now agreed that it will buy $25 billion worth of shares from the market. If the company successfully completes its buyback program, this will make it the largest ever undertaken by a Chinese tech stock. So far the company has repurchased $9.6B worth of shares in the last twelve months. The firm has progressively increased its share repurchase program, starting with $6 billion in May 2019, $10 billion in December 2020, and then $15 billion in August of the same year.

Alibaba Group Technical Analysis

Alibaba Group has been in a clear downwards channel that started at the beginning of this year. Shares are showing promise of breaking out of this channel as momentum has briefly shifted to the upside, but volume is not presently supporting this upwards movement. Due to the ongoing concerns about the coronavirus pandemic in China and lockdowns in Shanghai, increased volatility in the company's earnings and technicals is expected in the near future. As it stands now the company looks to continue its downwards trajectory before reverting back to its mean price.