Alibaba's Overhaul Costs And Challenges To Weigh On Stock Near-Term Before Adding Value, Analysts Expect

Alibaba Group Holding Limited BABA analysts re-rated the stock after the company shared its IPO plans for the Cloud division, and others posted upbeat fourth-quarter results.

Truist analyst Youssef Squali reiterated a Buy rating on the stock with a price target of $130.

The analyst maintained a constructive view on BABA, whose 4Q results reflect suitable cost containment amid improving demand in China and overseas. GMV growth was positive in March and April for China Commerce. 

However, the competition in both Commerce & Cloud is likely to keep investments high and margins in check short term. The analyst expects the major reorganization to increase accountability and drive operating and financial performance in the mid and long term. 

Near term, it should enact several catalysts, including Cloud's upcoming private capital raise and subsequent spin-off and Cainiao & Freshippo IPOs, which should create material shareholder value.

While the lack of near-term guidance from management and the commentary around the need to continue to invest aggressively to regain share in Commerce and Cloud are likely to weigh on the stock near-term, the analyst sees the company's reorganization as an even bigger driver of value creation over time. 

Benchmark analyst Fawne Jiang maintained a Buy rating with a price target of $180.

Alibaba's complete spin-off of Cloud, IPOs of Cainiao and Freshippo, and external capital raising of international e-commerce will serve as a positive catalyst for BABA stock in the next 6-18 months, as these capital market actions will trigger the market's acknowledgment of the hidden value of the critical strategic assets, which ultimately would swing the market to evaluate BABA stock on Sum-of-the-Parts Valuation. 

Conversely, a lack of near-quarter guidance and margin uncertainties due to pivoting toward growth may reduce near-quarter visibility.

Argus analyst had a Hold rating on the stock. Under the plan disclosed in March, the six new business units will be more distinct, with individual CEO and a board of directors. Except for Taobao Tmall Business Group, representing Alibaba's core China commerce business, the new units will have the flexibility to raise outside capital and potentially seek an initial public offering. 

BABA has underperformed recently due to increased competition, political pressures, and macroeconomic softness. The initial stock surge on the reorganization news reversed as investors considered the implications of any reorganization. 

It will incur costs, challenges, and distractions in implementing the overhaul. 

Goldman Sachs had a Buy rating on the stock post 4Q, backed by its focused three-year plan for Taobao-Tmall's comeback and Cloud distribution.

Price Action: BABA shares traded lower by 1.32% at $84.65 on the last check Friday.

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