Alibaba stock recovery has momentum. This is a potential risk.

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Analysts are increasingly optimistic

Alibaba

Shares amid the group’s quarterly earnings that bolstered the narrative that the Chinese tech company’s recovery is on track. But a familiar challenge could return.

Alibaba Group Holding (ticker: BABA) shares lost almost half of their market value in 2021 as Beijing cracked down on China’s tech sector. In 2022, things were just as difficult. Regulatory pressures continued while mainland economic growth slowed, hurting Alibaba’s bottom line amid sweeping lockdowns aimed at eradicating Covid-19.

However, the end of last year brought some crucial changes. China changed its Covid-19 policy and pledged to reopen the economy. And officials signaled they would ease regulatory pressure, including by working with US authorities. Analysts were more bullish on Alibaba, helping the stock surge 90% from a multi-year low hit in October to a peak in late January.

But now the momentum has stalled. Alibaba stock is down nearly 20% over the past month.

The decline came despite last week’s quarterly earnings, which prompted some analysts to reiterate their optimistic views on the stock. Alibaba posted a better profit than Wall Street had expected and delivered revenue growth in a quarter when China’s lockdowns were still weighing heavily.

Among analysts polled by FactSet, Alibaba receives an average buy rating, while the average share price target is $143, well above Monday’s close of $89. Fourteen analysts have raised their price targets since last week’s gains.

“We remain constructive on Alibaba, its [latest] The results show continued improvement in margins amid a challenging demand environment,” Youssef Squali, an analyst at Truist Securities, wrote in a statement last week. “While the March quarter started weak, demand trends have since improved significantly as the economy reopened, driving positive year-over-year growth. We are encouraged by current trends.”

Squali gives Alibaba a Buy rating. He raised his price target from $120 to $130.

Analysts led by Benchmark’s Fawne Jiang struck a similar tone, saying Alibaba “has a favorable risk-reward profile in our view, with a reopening recovery on the way.” Benchmark rates the stock as Buy with a price target of $180, but notes that “downside risks include macro headwinds, increasing regulations, the implementation of new business initiatives and competition.”

One of those risks might turn out to be more pronounced than others: the regulatory backdrop, which has become a concern for investors in the company since Beijing began cracking down on tech in late 2020.

Investors should pay attention

China Renaissance

(1911.HK), a Shanghai investment bank. The stock has fallen nearly 30% since mid-February, when its chairman, CEO, and controlling shareholder — high-flying tech financier Bao Fan — disappeared. It’s not entirely uncommon for Chinese business numbers to disappear amid regulatory scrutiny — Alibaba founder Jack Ma once did it himself, sending China’s tech sector cringe.

Bao Fan is currently cooperating with an investigation being conducted by the Chinese authorities, China Renaissance announced in a regulatory filing on Sunday.

This could be an indication that the attitude among regulators could be sour. It would be an unwelcome signal for a tech sector — led by Alibaba — that is well on the way to recovery.

Write to Jack Denton at jack.denton@barrons.com