(Bloomberg) — Investors looking for an end to the steep decline in shares of Chinese e-commerce company Alibaba Group may be in for a long wait if options traders are right.
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The company's stock has fallen nearly 80% from its all-time high in 2020, leaving its valuation at an all-time low and its market capitalization on par with upstart rival PDD Holdings. Derivatives markets are showing more pain, with options skew showing increased bearishness ahead of Alibaba's earnings report scheduled for Wednesday. On Monday, the most traded put contracts in Hong Kong were bets that stock prices would fall 14% by the end of April.
Alibaba's sales for the three months through December are expected to rise 5.6% from a year ago, the weakest growth in three quarters due to tough economic conditions and heavy discounting. The company's future profit forecast has fallen by about 4% in the past month.
China's online retail market is becoming increasingly crowded, with heavyweights Alibaba and Jingdong Mall facing new entrants such as Douyin Mall, run by TikTok owner ByteDance. At the same time, price competition is intensifying due to persistent deflationary pressure and falling wages. It was acquired by discounters such as Pinduoduo, the local equivalent of PDD's Temu.
“The focus is on whether Alibaba can survive the macro downturn,'' said DBS Vickers Hong Kong analyst Tam Ziwan. “We expect it to lose market share.” Another focus is whether new drivers can be introduced to sustain overall growth. ”
The stock trades at a forward P/E ratio of 8 times, near record low valuations, making it one of China's cheapest tech stocks. By contrast, Hong Kong-listed power company CLP Holdings is trading at about 13 times expected earnings, similar to the Hang Seng Tech index.
Alibaba spent $9.5 billion on share buybacks last year, the highest amount on record, and still has about $12 billion left to spend on buybacks through 2025, according to data compiled by Bloomberg. That's what it means. Goldman Sachs Group Inc. analyst Ronald Kuhn said the company could spend half of its free cash flow on stock buybacks and could declare a special dividend after the sale. He maintains a buy rating on Alibaba, saying the company's valuation is attractive.
Option traders are not as optimistic as put option trading volume has skyrocketed in recent days. These include contracts betting that stock prices will fall by more than 3% by the end of April. The market is pricing in a 5.6% rise in either direction for the stock immediately after Wednesday's earnings, which would be one of the biggest post-earnings moves for the stock in two years.
The transformation efforts led by the company's new management team include scaling back non-core businesses while ramping up investment in global expansion and artificial intelligence. The company is focusing on improving its core operations, including moving resources from the Tmall site to Taobao to meet demand for cheaper products, but it may take time to see results.
This emphasis on low prices leads to slower earnings growth, which is “certainly negative for near-term sentiment and stock prices,” JPMorgan Chase analysts including Alex Yao said. Alibaba's profit forecast for this fiscal year has been revised downward. Last month it was 3%. Growth in the company's core business is likely to “continue to be lackluster over the next four quarters.”
(Updated as of Tuesday morning trading)
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