Alibaba bear: most accurate analyst maintains sell rating, says earnings outlook dire for internet giant and peers like Tencent
- An analyst whose calls on Alibaba beat 67 peers over the last year cut his price target for the tech giant’s stock by 15 per cent despite its recent positive results
- The next quarter will be very challenging as the impact of Covid-19 lockdowns on consumer spending and advertising budgets becomes clear, he says
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.
“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.”
Alibaba’s US shares last traded at US$96.05, 13 per cent above the share-price estimate set by Muehl. The stock dropped 1.7 per cent to HK$94.60 in Hong Kong on Wednesday, retreating from an almost 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 in May. That implies a 9.3 per cent downside from current levels.
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.