Alibaba's 80% loss may extend due to competition concerns

(Bloomberg) — Investors looking to cap the free fall in shares of Chinese e-commerce company Alibaba Group Holding Ltd. may have a long wait, if options traders are right.

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The stock's nearly 80% decline from its record high in 2020 has pushed its valuation to an all-time low and put its market value on par with upstart rival PDD Holdings Inc. The derivatives market is indicating more pain, as options divergence shows an increase in the downside. Ahead of Alibaba's earnings report scheduled for release on Wednesday. A short contract that bets the stock will fall 14% by the end of April was the most actively traded Monday in Hong Kong.

Alibaba's revenue for the three months through December is expected to rise 5.6% from a year ago, the slowest growth in three quarters amid difficult economic conditions and steep discounting. The company's forward earnings estimates fell about 4% over the past month.

China's online retail market is becoming crowded, with Alibaba and JD.com Inc. facing off. New entrants including Douyin Mall, operated by TikTok owner ByteDance Ltd. At the same time, persistent deflationary pressure and falling wages sparked a price war. It was won by discounters like Pinduoduo, the local equivalent of PDD's Temu.

“The focus is whether Alibaba can survive the overall weakness,” said Tam Tsz Wang, an analyst at DBS Vickers Hong Kong Ltd. “The market expects it to lose market share as it faces fierce competition from rivals like Douyin and PDD. Another focus will be It is whether they are able to import new drivers to maintain their overall growth.

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The stock trades at 8 times forward earnings, near its lowest valuation ever, making it one of the cheapest tech stocks in China. In comparison, Hong Kong-listed utility company CLP Holdings Ltd. About 13 times expected earnings, as is the case with the Hang Seng Tech Index.

Alibaba spent $9.5 billion on stock buybacks last year, a record, according to data compiled by Bloomberg, and says it still has about $12 billion left until 2025 to spend on buybacks. The company may spend half of its free cash flow on buybacks and could also announce a special dividend after divesting the business, according to a Goldman Sachs Group Inc. analyst. Ronald Keung. He maintains a Buy rating on Alibaba, citing its attractive valuation.

Options traders are less optimistic, with put options trading volume rising in recent days. These include a contract betting that the stock will fall more than 3% before the end of April. The market is pricing the stock in a 5.6% move in either direction in the immediate aftermath of Wednesday's results, which would be one of the stock's biggest post-earnings moves in two years.

Renewal efforts led by the company's new management include scaling back non-core businesses while investing more in global expansion and artificial intelligence. It is focusing on improving core operations, including moving resources from its Tmall site to Taobao in order to better meet demand for cheaper products, although it may take some time to see results.

This focus on lower prices will lead to weak revenue growth, which is “certainly negative for sentiment and stock prices in the near term,” said JPMorgan Chase & Co. analysts, including Alex Yao, who lowered his estimate for Alibaba's earnings for the current year by 3. % Last month. Growth in the company's core business is likely to remain “lackluster in the next four quarters.”

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(Updates as of Tuesday morning trading)

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