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Chinese flagship company Alibaba (NYSE:BABA) — which specializes in e-commerce, internet solutions and technology — suffered a sizable hit on Thursday. Analysts at Macquarie cast doubt on BABA stock as they believe its forward earnings potential is limited. Struggling for traction since late 2020, all eyes center on the Chinese consumer economy. As well, investors need to see evidence that Alibaba can pivot to Southeast Asia.
According to a Seeking Alpha report, Macquarie downgraded BABA stock to “neutral,” with analysts concerned about the underlying company’s balancing of defensive and expansionary endeavors. These contradictory directives could potentially cap earnings upside for the foreseeable future. As well, the experts — led by Ellie Jiang — reduced the price target by 4% to $85.40.
Not helping matters was a muted performance in Alibaba’s fiscal third quarter (ending December). Per CNBC, revenue missed expectations, growing just 5% on a year-over-year basis. Conspicuously, the company’s e-commerce business and cloud computing division remained slow.
Moreover, Macquarie stated that Alibaba’s leadership team committed to stepping up investments to defend its market leadership. Therefore, they decided to cut EBITDA estimates to reflect the more aggressive spending.
To be sure, Alibaba expressed a commitment to reignite growth in its core businesses of e-commerce and cloud computing. However, skepticism lingers over the company due to massive broader headwinds.
BABA Stock Contends with a Challenging Economic Backdrop
For BABA stock and the underlying Chinese economy, it’s a tale of two cities. On the one hand, the U.S. — which represents a key destination for China’s exported products — has seen its economic engine rise from the ashes of the Covid-19 disruption. But on the other hand, consumer spending in the world’s second-biggest economy hasn’t roared back to pre-pandemic levels yet.
Compounding matters for BABA stock is a deep concern among investors and officials that China no longer represents a reliable growth engine, per The Economist. As it pointed out, “[t]he country’s property boom is over. Cash-strapped developers are afraid to start building flats and people are afraid to buy them. The infrastructure mania has run out of road: indebted local governments lack the funds.”
On the surface, then, Macquarie appears right to be skeptical about BABA stock. However, that doesn’t necessarily mean that Alibaba is doomed for failure. But the path to progress will likely be difficult, which depends on the company’s ability to pivot.
Specifically, Nikkei Asia argued that China’s slowdown won’t stop growth in Southeast Asia. If so, that might be a lifeline for BABA stock. Over the years, Alibaba has invested billions in Lazada, a Southeast Asian online shopping platform that it controls.
Why It Matters
Still, even with Alibaba’s concerted efforts in boosting Lazada, it still faces significant pressure. Last month, the company issued a headcount reduction. Further, the business arm competes against fierce rivals in the region. Nevertheless, the good news is that BABA stock still commands a strong buy consensus view among analysts overall.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.