Alibaba's Prospects Dim as China Starts Year Slow

China's economy shows mixed signals as the new year begins, indicating a soft start. This could impact Alibaba, particularly its outlook, as China remains its largest market.

Data Shows Mixed Signals, Trending in Different Directions

The latest private sector PMI data from Caixin/S&P Global showed a modest retracement to 52.7 in January from 52.9 in December. However, it remained firmly in expansion territory, consistent with earlier official data showing contraction compared to the private reading remaining in expansion. Export orders in the private Caixin manufacturing PMI increased for the first time in seven months, a positive sign for smaller, export-focused companies.

In a nutshell, the recent data suggests China is having a sluggish start to 2024. New service orders have expanded but at their slowest pace since the early months of  2022, before the latest wave of lockdowns, signalling cautious consumer behaviour. Prices paid by businesses have been reduced to attract customers, reflecting dwindling consumer confidence and underpinning the threat of deflation. The lacklustre performance could fuel speculation of more stimulus from the PBOC, with annual inflation expected to remain negative at -0.4% come Thursday.

Alibaba Faces Headwinds from China's Slowing Economy

With China experiencing a deceleration in its economy while accounting for 65% of Alibaba's market share, there's an expectation of a drop in Alibaba's sales and income for Q4 2023. EPS is forecast to dip to $2.67 from $2.79 in the last quarter of 2022. Over three years, the company has seen its stock plummet by more than 70%, primarily due to the pandemic's ramifications and the slow pace of e-commerce growth compared to other nations.

The stock has rebounded following a recent move where its founders invested over $200 million to buy company shares. However, BABA continues to face threats from further potential declines in mainland stocks this year, which has already lost around $7 trillion. Interestingly, while smaller Chinese stocks have declined by more than 27% so far this year, larger companies have outperformed due to optimism surrounding potential stimulus measures. Investors will be keenly awaiting signs that Alibaba will harness new AI technologies and cloud computing services to counter the economic challenges of its own markets at home, with high hopes pinned on the upcoming Wednesday earnings report.

Alibaba in Upward Momentum Short-Term

Alibaba's share price has formed a temporary floor, part of a potential falling edge pattern. A break above $78 could increase the likelihood of a bottom. Should the price advance beyond the swing spot, bulls may target the high of $88 next, with a subsequent objective being triple digits. However, if selling pressure intensifies and the stock declines below $66, losing the recent momentum, BABA could retrace further to test record lows. A breakdown under the round support of $60 may raise the probability of a double-bottom materialising in the region of $58.

Source: SpreadEx / Alibaba

Key Takeaways

China's slowing economy impacts Alibaba as the company derives most of its revenue from the country. Analysts forecast that Alibaba's sales and earnings will decline in the recent quarter due to China's economic headwinds. Alibaba's share price has fallen over 70% in the last three years due to various challenges but rebounded slightly after company founders purchased shares. However, it remains vulnerable to declines in the Chinese stock market. Investors will watch for signs Alibaba can offset the economic challenges through new initiatives.