The most accurate analyst tracking Alibaba Group Holding over the past year has maintained his bearish call on the e-commerce juggernaut and other Chinese tech stocks, arguing that their better-than-estimated recent results were simply due to base effect and cost savings.
Manuel Muehl, a Frankfurt-based analyst at DZ Bank, cut the price target of Alibaba’s American depositary shares by 15 per cent to US$85 even after the Chinese company last week posted revenue growth for the March quarter that exceeded analysts’ projections. While those results drove the company’s stock to a 17 per cent gain over two days, Muehl has maintained a sell rating on the stock, which he downgraded from a buy in July.
Muehl’s calls beat 67 peer analysts tracked by Bloomberg, according to the US financial-data provider. Investors who followed his sell rating, or shorted the stock, would have avoided steep losses as Alibaba tumbled 56 per cent over the past year, before accounting for transaction costs. He is the only analyst that currently has a sell rating on Alibaba.
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“We found the earnings season for the entire sector to be pretty lacklustre,” he said in an interview with the Post. “Margins have come down across the board, and revenue growth has been slowing substantially.”
Muehl’s bearish call may dampen optimism among some investors who believe the worst days for Chinese tech stocks have passed and that stock prices have already priced in industry headwinds. Alibaba’s US-traded shares have rallied 17 per cent since the quarterly earnings release, while its Hong Kong-traded shares have gained 19 per cent.
Research firm Alpine Macro recommended a long position on the Hang Seng Tech Index in a report published on Tuesday, although it shared Muehl’s caution about earnings expectations.
Alibaba’s US shares last traded at US$96.05, 13 per cent above the share-price estimate set by Muehl. The stock rose to HK$96.25 in Hong Kong on Tuesday, close to a four-week high. Alibaba owns the South China Morning Post.
While Alibaba’s 9 per cent revenue increase for the quarter ending in March beat estimates, the growth rate was the lowest on record, and net income for the period missed projections due to increased investments in new businesses and weaker consumer spending.
After a year of regulatory crackdowns, capital expenditures by Chinese tech companies increased significantly, which had severe consequences on the generation of free cash flows, a metric used by some analysts to gauge corporate financial health, according to Muehl.
“So from a fundamental perspective we currently see no reason to become extremely bullish,” he said.
Muehl has also kept a sell recommendation on Tencent since July and cut its price target by 4.6 per cent to HK$310 this month. That implies a 9.3 per cent downside from current levels.
DZ Bank’s bearish call was punctuated by a flip-flop at JPMorgan Chase, when its technology analyst Alex Yao abandoned his bullish call on China’s technology stocks to describe the entire sector as “uninvestable” in March. He cut his 12-month price targets for Alibaba to US$65 and HK$63 for its US- and Hong Kong-traded shares, versus the March 14 price of HK$63 – only to reverse the call two months later.
Brokerages including China International Capital Corp and Citic Securities last week lowered their earnings estimates for Alibaba for this financial year by as much as 11 per cent, arguing that weakened consumer spending will take over from regulatory curbs as the main headwind weighing on the tech sector.
Muehl echoes this view.
“Next quarter will be very challenging when we begin to see the impact of the lockdowns on consumer spending and advertising budgets,” he said.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.
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