Alibaba’s $46 Billion Stock-Market Swoon Tests Investors’ Love

(Bloomberg) — After months of exhilarating gains as hedge funds piled in and analysts upgraded target prices, Alibaba Group Holding Ltd.’s stock is losing its mojo and leading the decline in Chinese technology shares.

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Rising bearish bets on the e-commerce giant’s stock and falling earnings estimates suggest the slide can continue after a $46 billion wipeout over the past three weeks. Earnings on Thursday will likely show revenue barely grew in a quarter when China’s economy reopened from Covid curbs, with the company focusing on cost-cutting rather than business expansion.

“The rally in share prices has been huge, and there’s some profit taking now going into earnings,” said Chelsey Tam, equity analyst at Morningstar Asia Ltd. Investors will want to see management’s judgment on how rapid the reopening recovery will be from here, she added.

Seen as a proxy for China’s mass consumption, Alibaba’s share-price decline underscores doubts over the strength of the economy as the reopening excitement cools. While pent-up demand and a stabilizing regulatory environment will offer support, skeptics say much of the recovery outlook has been baked in, with few surprises for the sector expected from the National People’s Congress in March.

Sentiment is shifting after investors couldn’t get enough of Alibaba during the reopening rally which saw its American depositary receipts surging about 90% in the three months through Jan. 26. Regulatory filings in the US show hedge funds boosted their Alibaba holdings more than any other US-listed stocks last quarter.

READ: Hedge Funds Pile Into World’s Most Crowded Trade: China Today

Meantime, options data show traders maybe increasing purchases of bearish contracts that benefit from further declines, with the put-to-call ratio for Alibaba’s US shares picking up to levels last seen in October.

To be sure, a majority of market participants have faith in the company’s longer-term outlook with its strong e-commerce foundation in logistics, payment and customer base, and the potential of its cloud business. Consensus target prices suggest a 40% gain in share prices over the next 12 months.

Modest Earnings

But for now, it would take a healthy dose of policy and earnings surprises for the stock to resume its uptrend.

Alibaba’s revenue likely grew 1.4% last quarter from a year earlier, a far cry from the days of heady expansion, estimates compiled by Bloomberg show. Cost-control efforts probably helped gross margin rise to 39.2% from 36.7% the previous quarter. Analysts’ forward earnings-per-share estimates have fallen more than 6% from a December high.

The tech giant is curtailing its global expansion ambitions, increasingly focusing on core areas such as online shopping and cloud computing services. Alibaba last week sold off the last of its shares in Indian fintech giant Paytm, accelerating a withdrawal from the world’s fastest-growing mobile and internet arena, according to a person familiar with the matter.

“The next phase of the reopening rally will be driven by company fundamentals and macro recovery,” said Minyue Liu, investment specialist for Asian and Greater China equities at BNP Paribas Asset Management. “We are yet to see earnings getting better, which is why market has been quite volatile.”

Tech Chart of the Day

On a long-term horizon, the relative level of US tech stocks still looks elevated even after last year’s brutal selloff. The Nasdaq 100 Index isn’t far off historic highs versus the S&P 500 Index and is still trading near the peak that marked the implosion of the dot-com bubble. The tech-heavy gauge slumped 33% last year in the worst crash since the 2008 global financial crisis, but has rallied 13% this year on the optimism that the Federal Reserve will slow the pace of rate hikes.