Making money in Alibaba Group Holding stock might be as easy as saying "open sesame" as the company gets set to report its fiscal third-quarter earnings.
Alibaba, like many other tech stocks - particularly Chinese tech stocks - has been dragged down by fears that artificial intelligence will crush its profits. Reports of a recent shake-up in its own AI division aren't helping. And worries about Chinese consumer spending and inflation are adding to the Alibaba angst. Shares of the e-commerce and cloud giant have fallen more than 7% this year.
Many of the concerns are reflected in Alibaba's stock, which trades at 16 times earnings estimates for the next 12 months, below its 10-year average of 19 and a steep discount to top U.S. rival Amazon.com, which trades at about 26.5 times. Barron's also recently noted that the stock looks oversold on a technical basis.
Alibaba is set to release earnings on March 19. It's expected to report profits of $1.67 a share, down 43% from one year ago, on revenue of $42.1 billion, up 9%. But what it really does is give the company a chance to address the worries about its AI strategy. While Citigroup analyst Alicia Yap pointed out in a recent note that there have been reports of a management shake-up and executive departures at the company's Qwen chatbot unit, a sign of potential disagreements about AI strategy, she also noted that the Qwen AI agent reported strong demand for orders during the recent Chinese Lunar New Year celebrations.
Qwen is now fully integrated with several other Alibaba e-commerce services, such as Tmall, Taobao, Freshippo, and Alipay. Any color that the company's management can provide about the future direction of Qwen would likely be greeted warmly by analysts and investors.
But investors should also focus on Alibaba's other strengths. The company is expected to post strong growth in its cloud unit for the quarter, which provides web-hosting services and competes with Amazon, Google owner Alphabet, and Microsoft. Mizuho analyst Wei Fang contends that its cloud strength is being overlooked. She wrote in a recent report that the company's fundamentals are "incrementally healthier, driven by AI-accelerated growth," adding that Alibaba "holds the best cloud assets in China."
What's more, she argues, Alibaba is trading at a conglomerate discount and could be worth more if investors truly appreciated the value in its disparate businesses. Fang has an official price target of $195 a share on Alibaba, up 43% from current levels. But a sum-of-the-parts analysis suggests that Alibaba could be worth as much as $213 a share, she says, with most of the value in the company's core e-commerce and cloud units. Still, the company's other business lines plus its cash and investments alone are worth about $25 a share, she adds.
Yes, investors may continue to grapple with questions about the impact of AI on top tech stocks around the globe. But Alibaba is poised to bounce back once investors recognize that AI is actually an opportunity for the company as opposed to something that will make it obsolete.
Open sesame, indeed.
