Hong Kong, China – Investors concerned about the plummeting value of Alibaba Group Holding Ltd. shares may have to brace for a prolonged downturn, according to options traders. The company’s stock has dropped by 75% from its 2020 peak, leading to a historically low valuation and a market cap similar to that of competitor PDD Holdings Inc. The derivatives market is signaling more potential losses, with the options skew indicating increased bearishness ahead of Alibaba’s upcoming earnings report, set to be released on Wednesday.
One of the most traded options in the derivatives market is a put contract betting that the stock will decrease by over 10% by the end of April. Despite this, the company’s shares experienced a 7% climb in Hong Kong on Tuesday, spurred by optimism for positive earnings. The company advanced its reporting date, further fueling this optimism.
Analysts anticipate a 5.6% increase in Alibaba’s revenue for the last three months of the year. This would mark the slowest growth in three quarters due to challenging economic conditions and pervasive discounting. Furthermore, forward earnings estimates for the company have dropped by about 4% over the last month.
The online retail market in China is becoming increasingly crowded, with e-commerce giants like Alibaba and JD.com facing competition from newcomers such as Douyin Mall, owned by ByteDance Ltd., the company behind TikTok. Additionally, unrelenting deflationary pressure and declining wages have led to a price war dominated by discounters like Pinduoduo, the local equivalent of PDD’s Temu.
Analysts are focusing on whether Alibaba can survive the macro weakness and fierce competition from rivals like Douyin and PDD. Another concern is whether the company can introduce new drivers to maintain its overall growth. The stock is currently trading at 8 times forward earnings, near its lowest valuation ever and making it one of the cheapest technology stocks in China.
Despite the challenges, Alibaba remains invested in its share buyback program, with $12 billion remaining through 2025 for repurchases. The company may also allocate a significant portion of its free cash flow to buybacks and could announce special dividends after business divestments, according to analysts. However, options traders remain wary, as the trading volume of put options has spiked in recent days.
Alibaba’s management is focusing on revamping efforts, which include scaling down non-core business while increasing investments in global expansion and artificial intelligence. However, this shift towards lower prices is expected to result in weaker revenue growth, impacting near-term sentiment and share price. JPMorgan Chase & Co. analysts have slashed their estimate for Alibaba’s profit for the current year by 3%, predicting lackluster business growth in the next four quarters.