Why Alibaba’s Business Shakeup Isn’t Helping Its Stock At All

Alibaba Group Holding Ltd. is taking decisive steps to restructure its business in order to unlock greater value for its shareholders. However, despite these efforts, the company continues to face challenges that are weighing on its stock performance.

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Despite board approval for a spinoff of its cloud-computing business and the potential for more spinoffs in the future, Alibaba's shares experienced a 5.4% decline in Thursday's trading session. In Friday morning action, the stock indicated a further decline of 1%.

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The primary issue, according to analyst Richard Windsor, lies in Alibaba's core e-commerce business. The company's lackluster results from Thursday reveal a lack of recovery in the Chinese economy and highlight management's need to address various issues to get Alibaba back on track. Windsor, an independent analyst and Alibaba investor, noted that the decline in China commerce retail revenue, combined with Tencent's stronger performance, suggests that while there is moderate recovery in Chinese economic activity, Alibaba is not benefiting from it. Instead, Chinese consumers appear to be returning to brick-and-mortar stores, causing Alibaba to lose market share gained during the lockdown period.

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One concern is that Alibaba may need to increase its spending to maintain or improve its position in the market. Colin Sebastian, an analyst from Baird, highlighted the possibility of competitive pressures requiring incremental investments in Taobao/Tmall, which could put pressure on segment margins. Sebastian expects additional margin pressure as China Commerce focuses on user growth and app enhancements to drive higher engagement and purchase volumes. However, he did note that Alibaba's collaboration with WeChat is showing positive usage trends in Taobao.

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Sebastian maintained an outperform rating on Alibaba shares but lowered the target price from $120 to $115.

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Youssef Squali, an analyst from Truist Securities, also acknowledged the investment pressures Alibaba faces but remained optimistic about the company's long-term prospects. Squali highlighted the potential value creation resulting from the company's reorganization, which would make different units more agile, accountable, and better managed. Additionally, he pointed out specific catalysts for value creation, such as the spinoff of the Cloud business and the IPOs of Cainiao and Freshippo within the next 6-18 months.

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While the lack of near-term guidance and the need for aggressive investments may weigh on Alibaba's stock in the short term, Squali sees the company's reorganization as a significant driver of value creation over time.

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