• Alibaba earnings are released on February 7 before opening bell

• Revenue and earnings remain robust despite 2023 selloff

• Valuation has contracted way below growth stocks’ multiples

Alibaba feels the blues from Chinese economic downturn

Chinese stocks had a bruising 2023 as the domestic economy has yet to recover to its pre-pandemic standards. Besides the underwhelming growth, the Chinese property market seems as shaky as ever, putting additional downside pressures to the stock market.

Alibaba could not escape this storm, with its shares currently being 35% lower than a year ago. Interestingly, even though tech stocks have been rallying across the globe since early 2023, Alibaba has not even managed to outperform the Hang Seng index in the same time horizon. A possible explanation for that could be the never-ending regulatory assault by the Chinese government towards the company.

Foreign investors pull the rug

Alibaba has been displaying persistent fundamental strength, thus its vast selloff is clearly a product of exogenous factors. The long-lasting trade tensions between the US and China have pushed foreign institutional investors to clip their exposure in Chinese equities. Therefore, it has been very difficult for Alibaba to retain foreign funds in a period when its US competitors have been rallying to consecutive all-time highs.

Financials diverge from price action

Alibaba is anticipated to post solid financial performance despite China’s dire macroeconomic outlook. The online retailer is expected to post revenue of $263.96 billion for the fourth quarter, according to consensus estimates by LSEG analysts, which would represent a year-on-year increase of 6.54%. Additionally, earnings per share (EPS) are estimated at $19.38, marking a marginal 0.61% advance on an annual basis.

Cheaper than ever

From a valuation perspective, it seems that Alibaba has lost its shine. Besides surrendering its pre-pandemic premium against the S&P 500, Alibaba is currently trading more-or-less in line with the Hang Seng index, which is hovering at its lowest forward P/E ratio ever. Specifically, Alibaba is currently trading at 7.6x forward earnings, way below its five-year average of 17.5x.

Considering the innovative sectors that Alibaba is operating in, its valuation seems rather compressed, reflecting a huge bargain for those willing to accept the geopolitical and domestic uncertainties. On that note, SEC filings revealed that Alibaba founder Jack Ma and current Chairman Joe Tsai bought shares on January 23. Generally, when insiders purchase shares, it is often considered bullish for a stock, especially at such a historical low valuation.

Levels to watch

Alibaba’s stock has been in a sustained downtrend since the beginning of 2023, creating a clear structure of lower highs and lower lows. In the short term, the price has been attempting a minor rebound, but the 50-day simple moving average (SMA) has rejected further advances multiple times.

If financial results disappoint, the retreat could extend towards the 2024 bottom of $66.60. Even lower, the 2022 low of $58.00 could come under examination.

On the flipside, upbeat earnings might propel the price above the 50-day SMA towards the recent resistance of $78.00.  A violation of that zone could pave the way of the September-October resistance of $89.00.