Covid-19 Lockdowns Could Crimp Alibaba Earnings


Alibaba Group Holding slumped Wednesday after Citigroup warned about ongoing disruption from the Covid-19 virus. It was one of several factors weighing on the stock and its peers during the session, reports Barron.

Zero covid strategy     

Analyst Alicia Yap reiterated a Buy rating on Alibaba (ticker: BABA), but cut her price target to $177 from $200. Alibaba shares fell 4.1% to $106.50 in recent trading, as rising bond yields, concerns about tighter U.S. monetary policy, and Covid-19 lockdowns in China dragged on shares of Chinese tech companies.

The move comes as rising Covid case counts have spurred China—which has decided to pursue a zero-Covid strategy—to put more areas under lockdown, including the megacity of Shanghai. That has led to the largest round of quarantines since the first outbreak hit the nation more than two years ago.

Impact on economic activity

Yap writes that this has likely hurt overall economic activity in China, and in turn will mean lower profit growth for Alibaba in its fourth quarter—a trend that could drag on into fiscal 2023.

While Alibaba’s subsidies and support for merchants may be coming down, Yap writes that these ongoing efforts—along with revenue skewed toward lower-margin or loss-making businesses—will keep profit growth in check. She lowered her earnings estimates through fiscal 2024.

That said, the analyst is still bullish on the shares, given that they’re trading attractively while Alibaba is generating strong cash flows.

Yap isn’t alone in her stance. More analysts than not have been lowering their full-year earnings estimates for Alibaba in recent months, but 84% of the 55 tracked by FactSet still rate it at Buy or the equivalent.

Although continued lockdowns may be a concern, Alibaba and peers have gotten some good news recently. Earlier this month, reports said the Chinese government is drafting regulations that would allow most Chinese companies to keep their U.S. listings, although plenty of uncertainty remains.

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Source: Barrons


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