Bernstein analyst Robin Zhu downgrades Alibaba Group Holding Ltd (NYSE: BABA) from Outperform to Market Perform, lowering the price target from $130 to $98.
They upgraded Alibaba a year ago due to discounted constant low growth and the expectation that reopening would support growth. Despite its cheap valuation, the shares have since traded in a range.
The bear case for Alibaba now seems to be centered on constant low growth, as it is likely that the GMV growth will show improvement in the June quarter.
Feedback from merchants shows a lack of intention to increase marketing spend. With increasing quarterly comps, the risk of a value trap is growing.
Alibaba's problem may not be limited to user engagement. The large number of active merchants, almost double that of PDD Holdings Inc (NASDAQ: PDD), is driving up search costs and putting pressure on merchant ROI.
Questions remain about monetization and core FCF generation due to Alibaba's decision to focus on user time and engagement.
The recent change in management has raised hope for improved execution with a new strategy focused on Taobao and smaller merchants. However, a competitive e-commerce industry with 6-7 significant players growing at around 8-10% may naturally face increased competition.
Although Alibaba's shares are modestly valued, and the share count fell by 2.4% YoY at the end of FY23 due to buybacks, there are doubts about whether low multiples and modest EPS accretion can drive durable share price performance if the competitive problem in core e-commerce remains unresolved.
Concerns about the Cloud spin-off mainly revolve around the appropriate discount due to potential U.S. sanction risk, private sector business sentiment, and the number of Alibaba shareholders willing to sell on the first day.
Price Action: BABA shares traded higher by 2.03% at $87.21 on the last check Tuesday.