Argus Research has issued a HOLD rating for Alibaba Group Holding Ltd. (NYSE: BABA), reflecting the company's challenges amidst a slowing Chinese economy, intensifying competition, and stalled restructuring efforts. While Alibaba's e-commerce dominance and cloud operations present potential, near-term growth is underwhelming, with revenue and earnings falling short of consensus estimates for the past two quarters. The stock trades at $88.59, with a blended valuation suggesting a fair value of approximately $118. Investors should monitor restructuring progress and broader economic conditions for improved performance.

Current Valuation and Stock Performance

Blended Valuation and Price Action:

Argus estimates Alibaba's fair value at $118 per share, factoring in discounted cash flow and peer comparisons.
The stock closed at $88.59, suggesting limited upside in the near term based on current market sentiment.
Key Price Levels for Investors:

Support Level: $87 (near recent lows).
Resistance Level: $103 (52-week high).
Long-Term Target: $118, contingent on economic recovery and execution of restructuring plans.
Historical Performance:

Alibaba has underperformed peers, gaining only 15% YTD in 2024, compared to a 22% average for the sector.

Revenue and Earnings Overview

Fiscal 2Q25 Results:

Revenue: RMB 236.5 billion ($33.7 billion), up 5% YoY but below the RMB 239.5 billion consensus.
Non-GAAP EPS: $2.15, flat YoY due to a stronger dollar.
Segment Insights:

Core Commerce:
Accounts for 42% of revenue; grew less than 1% YoY.
Weak domestic sales on platforms like Taobao and Tmall were offset by international growth.
Cloud Computing:
Revenue grew 7% YoY to RMB 29.6 billion, driven by AI adoption and scalable products.
EBITA margin improved to 9.0% from 5.1% a year ago.
International Commerce:
Achieved 29% YoY growth, driven by robust retail expansion.

Strategic Challenges and Risks

Economic and Competitive Pressures:

China's economic slowdown, demographic challenges, and weak consumer demand are significant headwinds.
Rivals like JD.com and Pinduoduo continue to gain market share in e-commerce.
Restructuring Delays:

Initial plans to split the company into six units have stalled due to macroeconomic and regulatory constraints.
The anticipated IPO of its cloud business and spin-offs of logistics and grocery units have been postponed.
Regulatory Risks:

Alibaba remains under scrutiny from Chinese authorities, limiting operational flexibility and profitability growth.

Growth Catalysts and Opportunities

AI and Cloud Innovation:

Alibaba Cloud is focusing on AI-driven growth, with triple-digit increases in revenue from proprietary AI solutions.
International Expansion:

Regions outside China, particularly Southeast Asia, continue to deliver higher growth rates compared to domestic operations.
E-commerce Monetization:

Initiatives like introducing a 0.6% software service fee and rebates for smaller merchants aim to optimize revenues.

Investment Recommendation

Why Hold?

Valuation Alignment: At $88.59, Alibaba’s price closely reflects its intrinsic value as estimated by Argus.
Uncertain Growth Trajectory: Delays in restructuring and China's economic conditions create near-term uncertainties.
Strong Cash Position: The company's robust financial health, including RMB 338.5 billion in cash, provides a buffer against headwinds.
Investor Actions:

Avoid aggressive positions until clearer restructuring timelines and economic stabilization emerge.
Reassess at technical breakouts above $103 or below $87.

Outlook and Risks

Future Outlook:

Improved consumer sentiment and policy reforms in China could reignite growth.
Strategic advancements in cloud computing and AI may unlock value over the long term.
Key Risks:

Prolonged economic challenges in China.
Failure to execute restructuring plans or gain competitive ground.