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Alibaba: Should You Catch This Falling Knife?

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“One-two punch definition: Two unpleasant things that happen together,” says the Cambridge Dictionary. It certainly feels like Alibaba (BABA) is right now on the receiving end of this dual blow.

Not only does the Chinese ecommerce giant currently have to contend with the prospect of slowing growth, but it is also facing an increasingly strict regulatory environment, as the Chinese government has been flexing, cracking down on any segment or organizations deemed to have gotten – to use another well-worn phrase - too big for their own boots.

These factors are a concern for Raymond James analyst Aaron Kessler. While long-term, the 5-star analyst remains “positive” on Alibaba, with the stock’s year-long descent (down 52% over the past 12 months) providing an “attractive” valuation, the analyst says, “recovery in shares could take longer.”

While the constantly changing regulatory landscape is difficult to navigate and is an overhang due to general uncertainty, the slowing growth is more tangible and evident in the numbers.

According to the National Bureau of Statistics of China, in the September quarter (based on quarter-to-date data), China eCommerce growth has slowed to ~8% year-over-year. This follows on from roughly 13% growth in the June quarter and ~26% in the March quarter.

Ecommerce growth has come under pressure from several directions; covid-related “intermittent lockdowns,” a decelerating growth outlook for Real Estate, and problems in the supply chain including recent power outages have all played their part.

“While some of these are transitory,” Kessler noted, “We believe these factors are weighing on consumer retail growth near-term and there is increased uncertainty in terms of a growth recovery.”

As such, for the September quarter, the analyst now expects China retail to show growth of 9% compared to the previous 16% estimate. There’s also a reduction of FY22/FY23 retail growth estimates, which move from 16% for each to 11% and 13%, respectively. Accordingly, Kessler also lowered his FY22/FY23 revenue expectations by 2%/3% while reducing EBITA estimates by 8%/11%.

It all results in a downgrade. Kessler cut his rating from Strong Buy to Outperform (i.e. Buy), while reducing his price target from $300 to $240. Nevertheless, despite these actions, investors still stand to take home returns of 73%, should the target be met over the one-year timeframe. (To watch Kessler’s track record, click here)

Turning now to the rest of the Street, where the average target is just above Kessler’s; at $247.67, the figure is set to provide 12-month gains of a strong ~79%. Most analysts remain in BABA’s corner; based on 23 Buys vs. 2 Holds and 1 Sell, the stock boasts a Strong Buy consensus rating. (See BABA stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.