Shares in Alibaba Group Holding ( (BABA) and HK:9988) jumped 12.2% in Hong Kong on Friday after the company reported better-than-expected fourth-quarter results, with the online giant claiming an astonishing 1 billion active consumers at home in China and 1.3 billion worldwide. However, there is still a lot of doubt surrounding BABA that should give investors pause.
The gains in Hong Kong follow through on a 14.8% advance in BABA in New York on Thursday. Lots of people would love for the rally to continue, and it might. But they should temper that excitement.
My colleagues at Real Money have done some sterling work looking at the quant side of Alibaba. The stock is sold out on the downside, technical analyst Bruce Kamich noted on Monday. He said earlier in the month that he would be looking for tradable rallies into both BABA and its China tech peer, Baidu ( (BIDU) and HK:9888), the "Chinese Google."
Baidu rallied 14.3% on Friday in Hong Kong, essentially matching the 14.1% gain on Wall Street the day before. Kamich cautioned "Don't Expect Too Much" and said investors should look for 10% moves to the upside. He also recommended paying attention to the price action, not the news, which is almost uniformly negative at the moment when it comes to the stock market.
The 10% upside has now happened for both BABA and BIDU. What's next?
Alibaba concedes that it doesn't know exactly. It failed to provide its customary earnings estimate for the next fiscal year, while acknowledging a dent to operations due to COVID that started in mid-March is and ongoing.
"Considering the risks and uncertainties arising from COVID-19, which we are not able to control and are difficult to predict, we believe it is prudent at this time not to give financial guidance as we typically do at the start of the fiscal year," the company said in its earnings statement.
It is important to watch the news in China for ideas of how Alibaba will perform. It is beholden to forces beyond its reach, originating in Beijing.
Jack Ma, once the shining light of Chinese entrepreneurship, has found out the hard way how unwise it is to criticize the Beijing government, so there's nothing in BABA's official release about tensions with the Chinese Communist Party. But the party has been waging a war on private business, making a beeline for Big Tech as its first target.
It goes without saying, literally, that Alibaba will also be beholden to the Chinese government for its performance in the next year. That's the kind of thing that doesn't factor into quant analysis of the stock. There's no warning when Beijing makes market-moving regulatory changes or drops a penalty bomb on tech companies.
The good news on the political front is that the Beijing leadership is currently too distracted by fighting COVID to fight with Big Tech as well. Indeed, the rising influence of Premier Li Keqiang in recent official pronouncements indicates that the technocrats and private-sector champions in the party are wresting back control, at least of the levers directing the economy.
Li gave a teleconference to more than 100,000 Communist Party officials on Wednesday in which he warned that the economic difficulties China now faces in fighting COVID-19 are greater than the challenge when the pandemic began in Wuhan in 2020. Greater "in some respects, and to a certain extent," anyway - Li isn't crazy enough to call out his boss, Chinese President Xi Jinping, without qualification. Li notes the jobless rate, industrial production, power consumption and cargo transportation all point to negative trends.
Those measures matter. Li has loaned his name to the "Li Keqiang Index," which uses such indicators to track the Chinese economy rather than the overall GDP. A WikiLeaks memo showed Li in 2007 told the U.S. ambassador that figures from Liaoning Province were unreliable and that the premier uses railway cargo volume, electricity consumption and bank loans to judge what local business conditions are like.
On Wednesday, Li stressed that "development is the key to solving all problems in China," delivering his message of urgency to the State Council, China's top administrative body. The council has ordered the implementation of 33 measures to stabilize the economy. Li insisted that these must be implemented by the end of May. The State Council is also dispatching task forces to 12 key provinces to put the policies in place.
It is highly unlikely that the Chinese economy will hit the target of growth of "around 5.5%" announced by Li in March. U.S. President Joe Biden and his team have already begun bragging that the U.S. economic growth rate is currently outpacing that of China for the first time since 1976.
That was certainly true in the fourth quarter of 2021, when the U.S. economy surged 6.9%, compared with the 4.0% pace in China. Forecasts for 2022 indicate a close-run race, although S&P Global has revised its forecasts for Chinese growth in 2022 down to 4.2% compared with 3.2% U.S. growth, thanks to the inflation- and war-induced slowdown stateside in the first quarter. China's official rate for the first quarter, of 4.8%, will undoubtedly lead into a worse second quarter, when lockdowns effects bite, making that 5.5% hurdle almost impossible to clear. Unless the number crunchers make up some really good ones...
Alibaba may benefit from efforts to spur consumer sentiment and consumer spending. We must wait to see if or when that happens.
Alibaba's revenue for the March quarter, its fiscal fourth quarter, rose 9% year over year to US$32.2 billion, which was 1.7% ahead of the consensus revenue estimate. E-commerce sales, though, were flat, while gross merchandise value sold on its Internet sites fell by the "low single digits," the company said. Operating income fell 30% to US$2.5 billion, knocked lower by the company burning money to popularize its Taocaicai community marketplace, which it launched selling groceries and daily necessities in March 2021, and its Taobao Deals bulk-buying program.
Investment losses for its equity holdings in other companies caused a net loss for the March quarter. The net loss hit US$2.9 billion, though it was still able to generate a profit for the full year, at US$21.5 billion, down 21% year over year. Full-year revenue climbed 19% to US$134.6 billion.
Not surprisingly, it is Chinese e-commerce that dominates performance. Services sales and cloud computing are growing fast but are small slivers of the overall pie, while overseas e-commerce jumped 25%, taking it to US$9.6 billion, or 10.3% of the total goods sales in China. Alibaba has 305 million active consumers in overseas markets. It has bought Lazada, which is active across most of Southeast Asia, as well as investing in the Turkish fast-fashion site Trendyol.com.
The effects of the lockdown in Shanghai and in dozens of other Chinese cities won't feed through until next quarter, meaning the next earnings won't be pretty. Shanghai, China's biggest city, is fighting to exit a two-month lockdown on June 1, and COVID case counts nationwide have now fallen for one week straight. But Beijing has also been locking down portions of the city, and dozens of other cities have controls on movement that are hurting their local economies. The Chinese authorities still have not figured out a way to combat the Omicron variant, so infectious but also less deadly, without persisting with the lockdown-opening-lockdown pattern.
They also have not worked out how to open China's borders to travel and trade. This "zero COVID" strategy may be manageable if China never reopens to international travel again. But as soon as it does, it risks re-importing Omicron and seeing the whole lockdown cycle repeat again. So while Shanghai may be exiting its nightmare, it could see another large-scale outbreak. There are 102 cities in China with more than 1 million residents. Any and all of them are vulnerable.
There are two key considerations that have led Chinese President Xi Jinping to double down on zero COVID and to promise harsh punishment for officials who do not pursue it with sufficient fervor. First is that he must seek re-election for a third term at the once-in-five-years Communist Party conclave this fall. "Beating" COVID is a key pillar in his platform. There are already signs that Xi's popularity is slumping due to problems with the economy, and the persistence of COVID despite such harsh treatment of citizens in the bid for disease control.
The second consideration is that the Chinese vaccines aren't as effective as the next-gen shots developed by BioNTech (BNTX) and Moderna (MRNA) . China refuses to import mRNA vaccines for purely political reasons and has not yet been able to back a Chinese pharma to concoct a homemade equivalent. If those efforts finally do bear fruit, there will be a race that couldn't finish quickly enough to roll out more-effective vaccines that would protect the vulnerable.
A failure to do so would lead to the Chinese healthcare system becoming overwhelmed. The creaking health infrastructure would be swamped by a "tsunami" of cases, according to a Fudan University study, as I explained earlier this month. The researchers estimate 1.55 million Chinese citizens would die.
Li is in an impossible situation in his attempts to bolster the Chinese economy. It wasn't obligatory for the top Communist Party official in cities to attend his teleconference, a source told Bloomberg, because they have to focus on fighting COVID. The career of a Communist Party rank-and-file member will end if he or she fails to stop outbreaks of the virus at a local level, whereas economic progress will be reflected down the line.
Alibaba, Baidu and their Chinese tech peers likely will be savaged in the calendar second quarter. This much we know already. How much stimulus China can afford to introduce hasn't yet been specified. We will need to wait for those details to predict whether it will turn into consumer spending that would benefit tech bottom lines. So far, China has resisted direct stimulus and tinkered with bank loans and mortgage rules instead.
The rest of the year and the recovery of an Alibaba stock that has lost 56% of its value in the last 12 months will depend on how quickly lockdowns end and Chinese consumer confidence returns. Those question marks linger, indicating short-term run-ups for Alibaba and Baidu, at best.