Alibaba: Promising, But No Need To Rush

Summary

  • The idea that the slowdown in China’s economy has reached the limit that prevents the regulator from further pressure on the technology sector allows us to reconsider future risks.
  • The interest in the current quarterly reports of Chinese companies stems from a desire to understand how the government’s zero tolerance for COVID19 has affected business results.
  • I am very afraid that the next quarterly report will unpleasantly surprise investors, as it will point to a further decline in Alibaba’s operating margin.
  • There was a bullish gap on March 11, which defined a zone of strong support. This support has been tested and confirmed. Next resistance is at $113. In my opinion, this level is the current target for the price.

Intro

In my last article on Alibaba on April 26, I stated:

…the price of the company’s shares fell below $86, which I personally consider critical. In my opinion, if the price does not rise above this level in the next two trading sessions, a further decline to the local low at $73 is very likely.

Exactly two trading sessions, the price of the company’s shares traded below the specified level, but then was able to exceed it:

TradingView.com, Author

Technically, this is a positive sign as it confirms support at $86. And the presence of support is a key condition for the formation of growth. But nevertheless, personally, I don’t see any reason to rush and buy now, despite the fact that I generally assess Alibaba’s long-term investment potential positively.

Information background

One of the reasons that allowed Alibaba to demonstrate counter-dynamics in relation to the market at the end of the last week, was the publication in The Wall Street Journal “China Plans Reprieve for Tech Giants, Including Delaying New Rules, as Economy Slows”.

Data by YCharts

According to this article, the Chinese authorities plan to temporarily relieve pressure on the technology sector in order to stem the fall in economic growth. In particular, the Cyberspace Administration of China next week will hold a meeting with the country’s largest technology companies, including Tencent. It is assumed that the regulator intends to postpone the introduction of new rules that limit the time young people spend on mobile applications.

In general, this is a positive message to the market. The idea that the slowdown in China’s economy has reached the limit that prevents the regulator from further pressure on the technology sector allows us to reconsider future risks.

But, according to the same article, Beijing can push bigtechs to sell 1% of their shares to the state in order to increase the degree of its participation in the activities of these companies. In addition, as early as May 1, the Chinese government held an emergency meeting with local and foreign banks to discuss ways to protect foreign assets of Chinese companies from potential US sanctions similar to those imposed on Russia. I have already expressed the idea that Ukraine is for Russia, as Taiwan is for China. Such precautionary measures by the Chinese government point to the development of such scenarios. With this, it already increases completely different risks…

In general, statements and actions are fundamentally different things. Personally, I would prefer to wait for specific actions of the Chinese regulator.

The importance of Alibaba’s next financial report

First quarter reporting of US companies is primarily of interest in terms of how high inflation affected their results. And here, by the way, it is worth noting that FAANG showed zero growth in real revenue for the first time in 20 years:

Crescat Capital

The interest in the current quarterly reports of Chinese companies stems from a desire to understand how the government’s zero tolerance for COVID19 has affected business results.

Let me remind you that Alibaba’s operating margin has been steadily declining since 2014:

Data by YCharts

According to the last report, income from operations was $5.056 bn (-32% YoY) and adjusted EBITDA, a non-GAAP measurement, decreased 25% YoY to $8.060 bn. This is how management explained this result:

The year-over-year decreases were primarily due to our increased investments in growth initiatives, such as Taobao Deals, Taocaicai, Lazada and Ele.me, and our increased spending for user growth, as well as our support to merchants.

In order to expand its market share, Alibaba has been increasing strategic investment for a long time. These investments consume most of the company’s profits:

Alibaba

Key statistics show that the total lockdown has significantly slowed the growth of the Chinese economy. For example, in March, the country reported the biggest decline in consumer spending (-3.5%) and the highest unemployment rate (5.8%) since the start of the pandemic. This state of the economy could further worsen the results of Alibaba’s core and non-core businesses.

So, I am very afraid that the next quarterly report will unpleasantly surprise investors, as it will point to a further decline in Alibaba’s operating margin.

Technical picture

As I noted at the very beginning, if we forget that we are dealing with Alibaba and look at the dynamics of quotes only in the context of technical analysis, then there are indeed signs for optimism:

TradingView

There was a bullish gap on March 11, which defined a zone of strong support. This support has been tested and confirmed. Next resistance is at $113. In my opinion, this level is the current target for the price.

Final thoughts

Don’t rush. Alibaba’s current, seven-year low price is really tempting to buy. But, despite the optimistic technical picture, the quarterly report is still worth waiting for. Even assuming that the risk of further regulation of China’s tech sector has diminished, it remains to be seen how the company will be affected by the overall slowdown in China’s economy due to the lockdown.

Author: Oleh Kombaiev, Seeking Alpha

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