Alibaba’s 80% Loss May Extend on Competition Worries

(Bloomberg) — Investors looking to halt the free fall in shares of Chinese e-commerce company Alibaba Group Holding Ltd. might have to wait a long time, if options traders are right.

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The stock's 75% fall from its 2020 record high pushed its valuation to an all-time low and put its market capitalization on par with its new rival, PDD Holdings Inc. Derivatives market indicates further trouble , with options bias showing increased downtrend ahead. of Alibaba's earnings report due Wednesday.

A put contract betting the stock will fall more than 10% by the end of April was the most traded Monday. Still, shares rose as much as 7% in Hong Kong on Tuesday amid optimism about positive earnings, especially as the company brought forward its closing date.

Alibaba's revenue for the three months through December is expected to have increased 5.6% from a year ago, the slowest growth in three quarters amid tough economic conditions and heavy discounting . The company's forward earnings estimates have fallen about 4% over the past month.

China's online retail market has become crowded, with mainstays Alibaba and Inc. facing new entrants including Douyin Mall, run by TikTok owner ByteDance Ltd. At the same time, persistent deflationary pressure and falling wages have led to an ongoing price war. won by discounters like Pinduoduo, the local equivalent of PDD's Temu.

“The issue is whether Alibaba can survive the macroeconomic weakness,” said Tam Tsz-Wang, an analyst at DBS Vickers Hong Kong Ltd. “The market expects to lose market share in the face of fierce competition from rivals like Douyin and PDD. Another focus would be on whether they are able to import new drivers to maintain their overall growth.

The stock trades at 8 times forward earnings, close to its lowest valuation on record, making it one of the cheapest tech stocks in China. By comparison, Hong Kong-listed utility CLP Holdings Ltd. trades at about 13 times expected earnings, as does the Hang Seng Tech Index.

Alibaba spent $9.5 billion on share buybacks last year, a record, according to data compiled by Bloomberg, and says it still has about $12 billion left through 2025 to spend on buybacks . The company could devote half of its free cash flow to buybacks and could also announce special dividends after business divestitures, according to Ronald Keung, an analyst at Goldman Sachs Group Inc. He maintains a buy rating on Alibaba, citing its attractive valuation.

Options traders are less optimistic as put trading volume has increased in recent days. The market is pricing in a 5.6% move in either direction immediately following Wednesday's results, which would be one of the largest post-earnings moves for the stock in two years.

The overhaul efforts led by the company's new leadership include scaling back non-core activities while stepping up investments in global expansion and artificial intelligence. The company is focused on improving its core operations, including moving resources from its Tmall site to Taobao to better meet demand for cheaper products, although it may take time to see results.

This focus on lower prices will lead to lower revenue growth, which “is certainly negative for near-term sentiment and the stock price,” said JPMorgan Chase & Co. analysts, including Alex Yao , which cut its estimate for Alibaba's current-year profit by 3% last month. Growth in the company's core business “will likely remain lackluster over the next four quarters.”

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(Updates with Alibaba stock movement Tuesday, adds Top Tech News section)

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