Concerns Over Chinese ‘Price War’ Sees Alibaba Stock Plunges Despite Major Earnings Beat

Key Takeaways

• Alibaba has announced a major earnings beat, with net income rising 69% compared to the same time last year
• After an initial boost to the stock price, BABA crashed back down over wider concerns around the Chinese tech sector
• The regulatory environment in China has been a major challenge over the past couple of years, but now that this is loosening there are concerns over a potential price war bringing down operating margins

Alibaba stock has been up and down like a yo-yo over the last couple of days, offering up a prime example of the volatility that can occur in the tech sector. Still, that volatility can be worth putting up with, if you consider some of the major gains that investors in the sector have enjoyed over the years.

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After a major earnings beat announced on Thursday, Alibaba (NYSE:BABA) stock soared over 6%, before crashing back down to earth less than 24 hours later.

The slump isn’t just down to Alibaba’s performance, but part of the wider fall felt in the Chinese tech sector, as companies grapple with the price wars and political tension.

Let’s take a look at what this latest round of results means for investors.

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Alibaba earnings beat analysts expectations

Alibaba has recorded its financial results for the quarter ending December 31st, 2022. Overall, the numbers for the e-commerce behemoth were very positive, coming in above analysts expectations on most major metrics.

According to data from Refinitiv, revenue for the quarter hit 247.76 billion Chinese yuan ($35.68 billion) against the forecast figure of 245.18 billion ($35.31 billion). Not only was this figure above expectations, but it was up slightly (2%) from the same time last year.

Impressive given the rocky 2022 that’s been experienced, particularly in China.

Net income came in way above expectations, hitting 46.82 billion yuan ($6.74 billion) compared to the 34.02 billion ($4.9 billion) that analysts had been expecting. That figure was up a whopping 69% year on year.

The company has not had an easy run, with China’s controversial ‘zero covid’ policies causing mass shutdowns of factories and major disruptions to supply chains and the broader Chinese economy.

While the country is now starting to open up, the impact is still being felt.

Chinese tech stocks under pressure

The Chinese tech sector has been put through the ringer over the past couple of years, with strict regulations being handed down from Beijing. The new rules have made sweeping changes to the way tech companies operate, including a crackdown on the use of data and antitrust laws.

This regulatory crackdown included major fines for some of Chinese tech’s biggest players, including a $2.8 billion fine for Alibaba for anti-competitive business practices.

These interventions, along with the strict Covid policies causing significant factory shutdowns and the overall economic uncertainty being felt all across the world, have made 2022 just as difficult for Chinese tech companies as their Silicon Valley counterparts.

After rallying through the last quarter of 2022 and into the early part of 2023, Chinese tech stocks have fallen dramatically over the last month. The Hang Seng Tech Index, which represents the 30 largest tech companies listed in Hong Kong, is down 12.22% since January 19th.

What’s happening with Alibaba stock?

Alibaba stock has been on a wild ride over the past couple of days. Initially, the stock rallied off the back of the positive earnings announcement, gaining 6% on the news. As other Chinese tech stocks announced results, however, the overall sector pulled back significantly, taking Alibaba with it.

The stock rose just about $100 in early hours trading on Thursday morning, before closing back down at $94.16. Year to date the stock is up 2.37% according to Capital IQ, which marks a turnaround from 2022 when it finished the year down 26.82%.

After hitting a low of $63.15 in late October, BABA steadily gained throughout the final quarter of the year and through much of January to hit its highest recent close of $120.57. This is still significantly behind the stock’s all-time high closing price of $317.14 back in October 2020.

It remains to be seen whether the more recent performance is a short term pullback in an overall bullish trend, or a signal that the downward trend is due to recommence.

The bullish case for Alibaba

The regulatory crackdown in China has played havoc on the tech sector there, and Alibaba has borne the brunt of much of these changes. Now it appears as if the boot is being lifted, which will reduce the resources Alibaba needs to devote to keeping the Chinese Communist Party happy.

Not only that, but China’s economy is finally starting to open back up again, after dealing with extended Covid restrictions in their aims for a zero covid nation. This has caused mass factory shutdowns and major delays in the manufacturing process for the company.

Alibaba affiliate Ant Group, owner of the biggest payment platform in the world, AliPay, has been under investigation by China’s central bank, the People’s Bank of China (PBOC) for alleged unlicensed operations and infringement of consumer rights.

This problem too has now gone away, with the PBOC confirming that the issues have been rectified.

So with a raft of political and regulatory issues now put to bed, Alibaba is looking at clear blue sky for the first time in a long time. Not only that, but the Chinese internet regulator, the Cyberspace Administration of China, recently purchased 1% of the company.

According to data from Capital IQ, the company has projected revenue growth of 11.63% in the 12 months to March 31st, 2024, and 10.75% the year after that. The vast majority of analysts are rating Alibaba a BUY, including Citigroup, Goldman Sachs and Morgan Stanley.

The bearish case for Alibaba

It’s never just business when it comes to companies from China. We’ve seen the political issues that surround data gathering by companies such as ByteDance (parent company of TikTok), and Alibaba is already on an SEC watchlist for a potential delisting from the New York Stock Exchange.

Outside of these ever-present issues facing any Chinese company, Alibaba also isn’t immune to the overall economic uncertainty being felt the world over.

With cost of living pressures rising, discretionary spending and e-commerce companies such as Alibaba could find demand dry up as consumers tighten their belts. While Alibaba is primarily a B2B business, lower consumer demand will flow through to wholesalers.

There are also concerns that the relaxing of the regulatory regime could see Chinese tech stocks push hard for expansion, which could result in a price war and major damage to operating margins.

While the overall coverage from analysts is currently positive, a number of investment banks have recently downgraded their price targets for Alibaba, including Credit Suisse, Bank of America and HSBC.

The bottom line

Alibaba’s latest quarterly earnings announcement beat expectations, but that’s not to say it’s been all good news. The Chinese tech sector continues to come under pressure over concerns that the easing up of regulatory pressure could result in a price war in the sector.

It’s tough to figure out what these results mean for you as an investor and what technologies deserve your attention, particularly when dealing with overseas markets.

Q.ai’s Emerging Tech Kit was designed to put your portfolio on autopilot and make those tough decisions for you thanks to its AI-powered investment algorithms.

Download Q.ai today for access to AI-powered investment strategies.