Alibaba Group Holding Ltd (NYSE: BABA) shares have weakened more than 30% since August 26, 2022, and the current price stands at $72.19.
China’s economy is facing many headwinds like ongoing Covid controls, a deteriorating relationship with the US, reduced export, a housing bubble, which keep investors away from Chinese companies.
Unpredictable political risks
The first quarter of the 2023 fiscal year was quite positive for Alibaba, and the company reported revenue and profit higher than analysts’ consensus estimates.
Total revenue for the first fiscal quarter totaled $30.69 billion, which was $530 million above expectations, while the Non-GAAP earnings per share were $1.75 (beats by $0.19). Toby Xu, Chief Financial Officer of Alibaba Group, said:
Despite the challenges posed by the COVID-19 resurgence, we delivered stable revenue performance year-over-year. We have narrowed losses in key strategic businesses, given ongoing improvements in operating efficiency and increasing focus on cost optimization.
Alibaba continues to dominate the Chinese e-commerce market, but the company’s shares continue to show very poor performance. One of the reasons behind this is connected with the unpredictable political risks in times of President Xi’s goal of achieving social and political stability.
China President Xi showed the world that he would sacrifice economic gains for social stability when he praised the zero-Covid policy in cases where entire sections of the city or a whole region were shut down with even a few Covid cases.
Most importantly, President Xi likely views the big tech conglomerates as a core risk to his political stability, which will likely keep investor sentiment at its lows until some big changes happen.
Alibaba already faced investigation issues that put Alibaba’s collective businesses in the crosshairs of significant regulatory risk, and in the name of stability, the Chinese government can easily draw a future without Alibaba.
Despite this, investors who are willing to accept these risks could make a nice profit by investing in Alibaba shares at the current price.
With a market capitalization of $188 billion, Alibaba is inexpensive, and compared to Amazon.com, Inc (NASDAQ: AMZN), Alibaba is cheaper on a price-to-sales basis.
According price-to-sales ratio (market capitalization/revenues), Alibaba shares are trading at 1.40, which is nearly two times lower than the price-to-sales ratio of Amazon, which is trading at a P/S of 2.49.
It is also important to mention that Shopify Inc (NYSE: SHOP) trades at more than seven this year’s sales and more than ninety times last fiscal year’s EBITDA.
Alibaba trades at less than nine times last fiscal year’s EBITDA, under ten times forward EPS, and even in a highly uncertain macro and regulatory environment, this stock may be a good choice.
Bears in control of Alibaba
Alibaba shares have weakened more than 45% after reaching the highest level in 2022 of $138.70 on January 12, and the risk of further decline still persists.
Data source: tradingview.com
The current support level stands at $70, while $90 represents the first resistance level. If the price falls again below $70, it would be a “sell” signal, and we have the open way to $65 or even below.
On the other side, if the price jumps above $90, the next target could be resistance that stands at $100.
China’s economy is facing many headwinds like ongoing Covid controls, a deteriorating relationship with the US, reduced export, a housing bubble, which keep investors away from Chinese companies. Alibaba trades at less than nine times last fiscal year’s EBITDA, under ten times forward EPS, and even in a highly uncertain macro and regulatory environment, this stock may be a good choice.
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