The macro weakness in China, increased competitive activity, and COVID-led disruptions have weighed on the financial performance of internet giant Alibaba (NYSE: BABA). The company’s growth decelerated sequentially over the past several quarters.
Given the challenges, Alibaba stock has dropped nearly 54% from its 52-week high. While the slowdown in growth dragged its share price lower, regulatory headwinds further contributed to its decline.
What’s Next?
Though BABA stock has decreased substantially, COVID-led uncertainty and the economic slowdown could restrict the recovery in the short term. However, favorable government policies and easing COVID-19 restrictions could reaccelerate growth.
During last quarter’s conference call, Alibaba’s CEO, Daniel Zhang, indicated supportive government policies. Zhang stated, “[The] Chinese government has released important policy signals on its commitment to stabilize the economy.” Moreover, “They have also issued clear statements on promoting the development of internet platform economy through a healthy, regulatory environment.”
As the operating environment shows signs of improvement, US Tiger Securities analyst Bo Pei upgraded BABA stock to a Buy from a Hold.
Pei added, “Despite the more challenging June quarter, we are upgrading BABA to BUY as we believe both revenue and profitability will bottom out and hit a long-awaited inflection point in the quarter.”
The analyst expects Alibaba’s growth to improve in the second half of this year, benefitting from easier year-over-year comparisons and government stimulus.
Echoing similar sentiments, Bank of America Securities analyst Eddie Leung reiterated his Buy recommendation on BABA stock.
Offering updates from its virtual Innovative Conference with Alibaba, Leung said supply bottlenecks are easing. Further, Alibaba is witnessing an improvement in demand in some product categories. However, for the cloud business, “Alibaba sees resumption of some projects delayed by the lockdowns but expects an economic slowdown and moderate traffic growth among Internet sector clients to weigh on the near-term growth.”
Including Pei and Leung, Alibaba has received 16 Buy recommendations. Meanwhile, two analysts remain sidelined.
Overall, it sports a Strong Buy consensus rating on TipRanks. Further, the average Alibaba price target of $161.01 implies 51.2% upside potential.
Bottom Line
The easing of regulatory headwinds and COVID-led restrictions will likely support Alibaba’s growth. Moreover, easier year-over-year comparisons are positive. However, uncertainty related to the pandemic, an expected softness in the cloud business, and a tough macro environment pose challenges.
