Alibaba’s Stock Outlook Remains Bleak as Options Traders Exhibit Bearish Sentiment
Investors brace themselves for prolonged downturn as Alibaba faces fierce competition and macroeconomic challenges
Investors holding out hope for a recovery in the shares of Chinese e-commerce giant Alibaba Group Holding Ltd. are likely to be disappointed, according to options traders. The company’s stock has plummeted by almost 80% from its 2020 peak, reaching an all-time low in its valuation. Recent options trading data shows a growing bearish sentiment leading up to Wednesday’s scheduled earnings report. In fact, the most actively traded option on Monday in Hong Kong was a put contract that predicted a 14% decline in Alibaba’s stock by the end of April.
Intense Bearish Sentiment
Alibaba’s anticipated revenue for the three months ending December is projected to show a 5.6% increase compared to the previous year’s figures – the slowest growth in three quarters. The company’s earnings estimates have also decreased by around 4% in the past month, all against the backdrop of a challenging economic environment and substantial discounting. In the crowded Chinese online retail market, Alibaba and its rival JD.com Inc. are now facing competition from newcomers like ByteDance Ltd.’s Douyin Mall. In addition, price wars fueled by deflationary pressure and declining wages have allowed discounters such as Pinduoduo, the equivalent of PDD’s Temu, to gain an edge.
High-Stakes Focus and Daunting Rivalry
Amid concerns over Alibaba’s ability to navigate macroeconomic headwinds and ensure survival among its rivals, Tam Tsz-Wang, an analyst at DBS Vickers Hong Kong Ltd., highlights the market’s focus on the loss of market share and Alibaba’s need to bring in new drivers to sustain overall growth. The stock is currently trading at its lowest valuation ever, with a forward price-to-earnings ratio of 8, making it one of China’s cheapest technology stocks. By comparison, utility company CLP Holdings Ltd. and the Hang Seng Tech Index are trading at around 13 times and 13 times expected earnings, respectively. These figures emphasize the severe undervaluation Alibaba is currently facing.
Options Traders Signal Waning Confidence
Options trading paints a rather contrasting picture. Put options trading volume has surged in recent days, indicating a notable decline in confidence. Among the active contracts, one stands out with the expectation of a more than 3% slump in Alibaba’s stock price prior to the end of April. The options market has priced in a 5.6% swing in either direction following the release of Alibaba’s earnings report on Wednesday, which may lead to one of the biggest post-earnings movements in the stock over the past two years.
Fighting for Survival with New Strategies
In an attempt to revamp its fortunes, Alibaba’s new management team is actively engaged in scaling down non-core business activities while intensifying investments in global expansion and artificial intelligence initiatives. The company’s primary focus is on optimizing core operations, including a resource shift from the Tmall marketplace to Taobao, as it seeks to meet demands for more affordable products. However, it is important to note that the results of these transitions may require time to materialize.
Pricing Strategy Impact on Revenue Growth
While Alibaba’s drive towards lower prices may appease consumers, JPMorgan Chase & Co. analysts, including Alex Yao, caution that such a strategy will inevitably lead to weaker revenue growth. In fact, Yao and his team recently reduced their profit estimate for Alibaba’s current fiscal year by 3%. They believe that the company’s core business growth will continue to be lackluster for the next four quarters.
Alibaba remains committed to its buyback program, having spent a record-high $9.5 billion in share repurchases during the previous year. The company still holds approximately $12 billion for potential repurchases until 2025, which contributes to its attractive valuation, according to Goldman Sachs Group Inc. analyst Ronald Keung. However, Options traders diverge from such optimism, reflecting a bearish outlook for Alibaba in the immediate future.
As the market eagerly awaits Alibaba’s earnings report, the stock’s performance is watched with bated breath. With fierce competition and macroeconomic challenges continuing to pose threats, it remains to be seen whether Alibaba can reclaim its previous glory.
(Updates as of Tuesday morning trading)
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