BABA's Near Term Outlook
Improving operational efficiency will be one of the key topics BABA will focus on in the remaining months of 2022, given the current challenges in the macro economy and the consumer sector. I anticipate BABA to be more conservative with new investment and marketing activities, particularly on Taobao Deals and Taocaicai, as the major high-margin e-commerce sector's growth flattens.
BABA's China commerce sector's EBITA margins will grow from the already high level of nearly 31% seen in June. However, BABA's customer management revenue growth will be hindered in the upcoming quarters by slowing demand for discretionary goods, particularly in the clothing and cosmetics sectors, and greater competition from short video platforms.
In addition, although current expectations are reasonably modest given the consumer mindset, the 11.11 shopping festival will be a highlight event for BABA's merchants. However, the gloomy macroeconomic outlook suggests a softening demand which is partly reflected in the flat traffic volumes on alibaba.com in the last three months.
Alibaba currently trades at a price-to-earnings growth (PEG) ratio below 1x, which is generally considered favorable, as it indicates a stock's valuation relative to its growth potential. Forward PEG is calculated by dividing the 12-month forward P/E with the consensus forecast one-year forward EPS growth. Investors should also consider that Alibaba keeps around $69 billion in cash as of the end of June, representing nearly 40% of its current market cap ($172.65 billion).
Regulatory headwinds have weighed on Alibaba, which has historically traded at high multiples, prompting deep discounts to be considered value. Following last week's crash, BABA has fallen below its IPO price. There are signs that BABA has reached a point of maximum pessimism due to the terrible sentiment in the market and overreaction to any news relating to politics in China and the CCP.
