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Why Alibaba's business shakeup isn't helping its stock

By Emily Bary

Alibaba has bet that a splitting of the company can help unlock value, but bigger challenges have outweighed progress on that initiative

Alibaba Group Holding Ltd. is moving quickly to split up its business in a bid to unlock more value for shareholders, but the company's broader challenges continue to drag the stock down.

Even as Alibaba (9988.HK)signaled board approval for a spinoff of its cloud-computing business, with more likely spinoffs down the road, its shares fell 5.4% in Thursday's session and were indicating toward another decline, off 1% in Friday morning action.

The culprit, one analyst says, is trouble in the core e-commerce business. Alibaba's "very dull set of results" from Thursday morning showed "almost no recovery in the Chinese economy and that management has a lot of things to fix to get Alibaba back on track," wrote Richard Windsor, an independent analyst at Radio Free Mobile who also invests in Alibaba.

A decline in China commerce retail revenue, "combined with Tencent's much better performance implies that there is a moderate Chinese recovery in terms of activity, but Alibaba is not seeing any of it," Windsor wrote. "Instead, it appears to be losing share gained during the lockdown back to bricks and mortar as Chinese consumers head back out to the high street."

Read: Loeb's Third Point buys up new stakes in Alibaba, AMD and Alphabet while dumping Disney's stock

One concern is that Alibaba will have to spend more to maintain or improve its position, with Baird's Colin Sebastian writing that "competitive pressures may necessitate incremental investments in Taobao/Tmall, which could pressure segment margins."

Sebastian said he anticipates "incremental margin pressure as China Commerce pivots toward user growth and enhancements to the app to drive higher levels of engagement and purchase volumes," while acknowledging that Alibaba's "collaboration with WeChat already appears to be bearing some fruit with respect to usage trends in Taobao."

Sebastian rated Alibaba shares at outperform, though he cut his target price to $115 from $120.

Truist Securities analyst Youssef Squali acknowledged the investment pressures, though he remained upbeat about the long-term story.

"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, we see the company's re-org. as an even bigger driver of value creation over time," he wrote.

The move "would potentially not only allow the different units to be more nimble, more accountable and ultimately better managed, but also create specific catalysts for value creation around the spin-off of Cloud and the IPO-ing of at least two businesses, Cainiao and Freshippo within the next 6-18 months."

Squali had a buy rating and a $130 target price on the shares.

-Emily Bary

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05-20-23 0832ET

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