Don’t Catch the Falling Knife, Says JPMorgan

Amongst a market wide pullback, Alibaba (BABA) stock’s fall from grace over the past year has been one of the more eye-catching developments.

The ecommerce giant just can’t seem to catch a break. Covid has reared its ugly head in China again and the prospect of US desisting for Chinese stocks is ever-present. And these developments clamber on top of regulatory clampdowns in China, a slowing economy and Alibaba going heavy on the investment side.

Looking for a bright spot? Well, one is hard to find, appears to be the view of J.P. Morgan’s Alex Yao.

“Due to rising geopolitical and macro risks, we believe a large number of global investors are in the process of reducing exposure to the China Internet sector, leading to significant fund outflows from the sector,” the analyst recently said. “We believe Alibaba, as one of the most widely owned stocks within the China Internet sector, will continue to face stock selling pressure in the near term.”

Aside from the bearish macro sentiment, the fundamentals aren’t in great shape either. Due to the “hiking inflation and weakening consumption confidence” as a result of the COVID resurgence in China, Yao is concerned with the company’s near- to mid-term business outlook.

With the core commerce business facing increasing pressure and the Chinese government’s “common prosperity” initiative resulting in a call for more “social responsibility,” Yao thinks these could dent investor confidence in the company’s long-term “earnings generation capability.”

There is, however, one positive to note amongst the resoundingly negative take. As the company has already started to rein in investment spend and “optimize operations,” in the next few quarters, Yao expects to see sequential losses narrowing. “Faster-than-expected loss cuts could be a major upside risk this year,” he went on to say.

However, that is not enough to stop Yao’s rating slipping all the way from Overweight (i.e., Buy) to Underweight (i.e., Sell). The price target gets a haircut too, slashed from $180 to $65. The implication for investors? Downside of ~13%. (To watch Yao’s track record, click here)

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Yao, though, is on his own here. In fact, of the remaining 22 analyst reviews on record, 2 rate BABA a Hold, while all 20 others recommend to Buy, resulting in a Strong Buy consensus rating. The projected gains are plentiful too; at $173.3, the average target implies shares will rise by 123% over the coming year. (See Alibaba stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.