Is The Great Alibaba Recovery About To Begin?

Key Points

• Alibaba shares are up 100% from their lows. 
• Tailwinds are starting to emerge. 
• The risk of delisting is becoming less and less. 

2022 was unforgiving for Alibaba Group Holding Ltd - ADR NYSE: BABA after experiencing record lows not seen since 2016. This came as no surprise considering all China-specific news of the past year. A policy of zero-COVID ground production and demand to a halt, while antitrust legislation from the ruling party has zeroed in on its tech companies. The ongoing supply chain and labor shortages have certainly not helped the situation either. Was 2022 always a bad year with those kinds of headwinds?

Maybe, but things are starting to turn again, and it’s looking like the bulls are back. Alibaba has been rescued by major tailwinds set to carry it through 2023. Let’s take a look at some of them.

Positive Outlook

For starters, several stocks are being picked by analysts as being set to have a recovery rally in the year ahead. Alibaba is just the latest. On Monday, the team over at Morgan Stanley named the e-commerce giant their pick of the tech sector. Analyst Gary Yu and his team there told clients that investors have “underappreciated Alibaba's leverage to a consumption recovery in China." Mostly, this has been due to its retail strength in areas like consumer products. 

Yu also expects an easing in the regulatory climate in China, which should go a long way to reversing the selling pressure that sent shares down as much as 80% from their 2020 highs. But that’s not all. Founder Jack Ma recently revealed plans to step down as the CEO and hand the reins to someone else.

This is no surprise considering he has been at the forefront of a financial scandal and at odds with China’s elite. With his name now set to become disassociated from Alibaba, that’s one more risk and potential headwind removed. 

Alongside the bullish outlook, Morgan Stanley reiterated their Outperform rating and gave Alibaba shares a $150 price target. From where they closed on Wednesday, this points to an upside of some 30% that’s to be had from current levels. Shares are already up about 100% from last October's lows, so this outlook, along with Marketbeat’s Buy rating, only adds fuel to the theory that there’s a massive recovery rally in the works. 

Further tailwinds exist in the form of the zero-COVID policy being rolled back, which will finally allow the Chinese economy to heal after constantly living in fear of a lockdown. This comes after nationwide protests forced the government to yield, not something that’s often seen in China. 

Risk Factors for Alibaba

Risks exist, with the most prominent in the form of geo-political tensions. The US and China are not on good terms now compared to a decade ago. The war in Ukraine and rising tensions with Taiwan have not done the relationship any favors.

This has trickled down to businesses, too, with the US refusing to export semiconductor chips to China for fear that they may use these chips against them in the future. Retaliatory moves by the Chinese are not out of the question and would likely escalate things. 

Furthermore, the delisting risk that rocked Alibaba and its peers in recent years hasn’t come to pass as many of the bears expected. It still exists, but the longer Alibaba stays on the right side of US auditors, the greater the chance of its shares being a permanent fixture on the New York Stock Exchange.

Indeed, there was news on this front from the last week of December, when it was reported that many US-listed Chinese companies had dropped their plans to list in Hong Kong. This move had been positioned as their backup option to remain listed outside of China had the US followed through with the delisting threat.

Still, this is Alibaba, the beast from the east. While shares have been beaten down hard in recent years, there’s a shadow of their former self still there, as evidenced by the stock’s doubling in value in less than three months. They have a long road ahead to undo all the damage,  but investors need no reminder about how fast this stock can run.