Alibaba Stock Primed for Rebound on Sales Recovery

(Bloomberg) — Investors are betting Alibaba Group Holding Ltd. may finally see its fortunes turn around after a rough 2022 plagued by a 40% slump in the shares and rare sell calls from Wall Street analysts.

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Options data show that traders are pulling back on buying bearish contracts that benefit from further declines, with the put-to-call ratio for Alibaba’s US stock nearing a record low. The tech firm is expected to return to sales growth in the September quarter when it reports earnings on Thursday, following its first-ever drop for the prior period.

While dip buyers in the past year have been burned repeatedly when it comes to investing in China tech stocks, belief is growing that the worst of the private-sector crackdown is over. Beijing’s plans to ease a raft of virus restrictions in a significant pivot away from Covid Zero and a sweeping package to rescue the nation’s beleaguered property market are also adding to the optimism.

Alibaba is expected to report a 4.3% revenue increase for the quarter, along with the first margin gain since 2019. Investors will also be watching for updates on its effort to lower expenses along with guidance on further share buybacks. Shares rose as much as 4.6% on Monday morning in New York.

“Net income could beat Street consensus, given the cost-cutting measures and that the company has suspended lots of investments in some initiatives,” said Julia Pan, Shanghai-based analyst at UOB Kay Hian. She added that the company’s business should improve next month after the new quarantine rules are in place.

The consumption recovery is also looking more steady. Although Alibaba didn’t disclose full sales results for its signature Singles’ Day shopping festival for the first time, China’s biggest e-commerce company said gross merchandise value was in line with last year’s performance despite Covid headwinds. Ad sales, which had been hammered by lockdowns over the past year, may finally rebound as reopening measures lift the economy.

“Despite a more challenging economic backdrop, we expect this year’s shoppers to be equally exuberant,” said Nicholas Yeo, head of China equities at abrdn. “Disposable incomes are climbing across the nation and this affluence is driving growth in aspirational areas.”

To be sure, Alibaba faces broader challenges with the days of breakneck growth seen as over for the industry. Worries about the impact of US chip export legislation on the company’s cloud business are weighing on sentiment, while China’s full exit from Covid Zero is expected to be a long haul.

Yet sentiment is turning more positive, and it’s not just for Alibaba. According to options data, bearish bets are also easing for peers including JD.com and Tencent Holdings Ltd. Analysts are also expecting their earnings results to meet or even beat expectations.

“Valuations of tech and innovation stocks in China look very attractive compared to historical level and global peers,” said Minyue Liu, investment specialist for Asian and Greater China equities at BNP Paribas Asset Management. “The risk-reward is more on the reward side at current valuation level.”

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US technology and internet stocks staged a massive rally last week, with the Nasdaq 100 Index climbing 8.8% in its biggest advance since November 2020. The rally came as inflation cooled in October by more than forecast, fueling optimism the Federal Reserve will be less aggressive in raising interest rates. Microsoft Corp. climbed 12%, its biggest weekly gain since April 2015. Meta Platforms Inc. had an even bigger rally, soaring 24%, the most since July 2013. Meta, which remains down 66% this year, was also supported after it announced job cuts, a move that could help address concerns over expenses.