Alibaba Group Holding Limited - Risk Assessment ReportAlibaba Group Holding Limited (NYSE:BABA) shares gained over 7% in pre-market trading August 4 after posting good results for its difficult first fiscal quarter. Both sales and earnings per share were higher than expected. For the June quarter, revenue was $30.7 billion, similar to the previous year. Even though it was the weakest rate of growth on record, investors welcomed it because consensus had previously predicted a fall for the very first time in Alibaba's history owing to sweeping city-wide lockdowns in April and May. Earnings for the June quarter also above consensus projections by $0.19 per share, coming in at $1.75, highlighting smart cost reductions in the face of inflationary pressures and the higher expenses of navigating through COVID interruptions.
However, sentiment toward Alibaba shares remains shaky. All of its gains from the May to July rise have been erased in recent weeks, with the stock now down over 22% since the start of the year. The broad theme for Alibaba stock remains volatility, as positive uptrends supported by signs of easing regulatory crackdowns, an improving COVID situation in China, and government stimulus to shore up the Chinese economy have been shattered in recent weeks by news of heightened concerns about a faltering domestic economy and renewed regulatory concerns. The market's scepticism over Alibaba shares is underscored by the limited gain in pre-market trading following a favourable earnings surprise this morning.
However, sentiment toward Alibaba shares remains shaky. All of its gains from the May to July rise have been erased in recent weeks, with the stock now down over 20% since the start of the year. The broad theme for Alibaba stock remains volatility, as optimistic uptrends bolstered by signs of easing regulatory crackdowns, improved COVID situation in China, and government stimulus to sustain the Chinese economy have been shattered in recent weeks by news of heightened concerns about a faltering domestic economy and renewed regulatory concerns. The market's scepticism over Alibaba shares is underscored by the limited gain in pre-market trading following a favourable earnings surprise this morning.
Although Alibaba's valuation seems reasonable at present levels, given its strong balance sheet and continued dominance in e-commerce and cloud-computing services in China, the stock is nonetheless overshadowed by dangers that are in flux. The instability of Alibaba's comeback over the last year demonstrates that the fundamental dangers to the stock continue to overshadow any advantageous valuation. With all of Alibaba's key underlying concerns continuing in a very volatile condition with no structural signs of change, the stock has practically nothing to stand on its own against the extra challenge of brewing broad-based macro headwinds. Alibaba might fall in the short term as its primary Chinese market and surrounding overseas markets battle with a weakening macroeconomic environment, making it a high-risk investment decision despite what appear to be good pricing compared to rivals in a comparable company.
Risk Factors
The decline in Alibaba shares occurred in late 2020, when rising regulatory worries prompted a valuation adjustment in U.S listed Chinese securities. Since then, the condition has deteriorated as regulatory obstacles began to have an impact on Alibaba's basic performance. Subsequent macroeconomic challenges, like COVID interruptions in China and a deteriorating local and global economy, have only worsened the bad outcomes.
Despite recent optimism emanating from the conclusion of high-profile inquiries, such as the cybersecurity inquiry into DiDi Global (OTCPK:DIDIY) and the announcement of fresh gaming license permits, regulatory concerns remain apparent, and investors' trust is eroding. Markets continued to penalise the stock at the first indication of regulatory shortcomings, as seen by recent drops in response to reports that Alibaba was fined $375,000 in early July for breaking state guidelines on past acquisition disclosures. Its cloud division was being probed for its possible involvement in one of the country's greatest ever data breaches.
Regulatory probing of Alibaba's operations has had additional negative effects on its core performance. Due to growing national security concerns in the public sector, the company's cloud-computing business, Alicloud, is gradually declining in market share to its state-backed counterparts. In China, the unit's market share plummeted from 45.9 percent in 2019 to 36.7 percent in 2021, while state-backed rival Huawei's cloud market share more than quadrupled during the same period. Despite remaining China's top public cloud service provider, Alicloud is no longer the favoured option as the CCP intensifies efforts for data security within government entities. As a result, the Chinese government has eliminated foreign PCs and has accelerated the transition from private clouds like Alicloud to governmental cloud platforms, jeopardizing Alibaba's unified bottom-line performance. This is supported by a slowdown in Alibaba's highly successful cloud business in the first quarter, when sales increased by only 9% year on year, the weakest rate on record.
Alibaba annual report FY22
Chinese stocks are still kept captive by the HFCAA, as the US SEC ramps up efforts to guarantee that all securities on the United States stock market are governed by the same regulations and regulatory procedures, particularly complying with PCAOB audit inspection requirements. Investors' worries about the prospect of the company being delisted have recently returned as Alibaba was recently added to the list of delinquent firms whose auditors have disobeyed PCAOB inspection requirements. This essentially starts a countdown for Alibaba, putting it at risk of delisting from the NYSE if Chinese officials are unable to achieve a settlement with the SEC and PCAOB on giving up the books of its domestic firms for scrutiny.
The global economy's slowdown threatens to undermine Alibaba's recent change in focus to expanding its overseas e-commerce platforms. During the June quarter, Alibaba's foreign commerce retail sector sales fell by 2.7% year on year, while order volumes fell by 4.1% year on year. Rising inflation and restrictive central bank policies in Alibaba's key abroad markets, like the United States and Europe, have resulted in lower consumer discretionary spending, complicating Alibaba's efforts to compensate for domestic commerce slowdown with worldwide growth.
In the long run, we anticipate that the combined business will expand at a moderate five-year CAGR of 5.7 percent, with Alicloud serving as the catalyst. As noted in the preceding study, Beijing's regulatory makeover of the private sector over the last two years has fundamentally altered the exponential growth that Chinese big tech previously enjoyed. we anticipate that any long-term revival in Alibaba's business would be modest. However, given the macro uncertainties in both domestic and international markets, Alibaba's share price could possibly hit $70-75 range
