Alibaba Stock Drops for Second Day. Why It’s Time to Look Past China’s Misery.

Thursday did little to change the big picture. Official purchasing managers index (
PMI
) data showed the manufacturing sector at the heart of the Chinese economy experienced a contraction for the fifth consecutive month, with a reading of 49.7 (any reading below 50 represents a decline.)

Investors have swung into action to sell stocks, but there is reason to be more optimistic than the market would suggest. For one: the manufacturing PMI print was not as bad as expected. Economists surveyed by FactSet had estimated that metric at 49.5, so the actual number surprised to the upside, if only slightly. But good news has been very rare on this front, recently.

More broadly, as Barron’s has reported, pockets of China’s economy are showing improvement. It might be too early to call for an economic rebound, but nevertheless there are indications of resilience in China that could signal that the worst of the pain being felt in the forward-looking stock market may be over.

The crux of this optimism is data from research firm China Beige Book. The group surveyed 1,300 firms from Aug. 17 to Aug. 25 and revealed that Chinese consumers continue to spend on travel and leisure, with retail spending on track to reverse July’s deceleration. Moreover, job growth has picked up in every sector except the heavily-distressed property industry, the research group said, as companies borrowed more money in response to stimulus measures.

It may be only a matter of time before stocks like Alibaba start responding more positively to Chinese economic data releases, instead of moving relentlessly lower after each print.

More specifically for Alibaba, analysts are optimistic the tech giant’s plan to break itself up—and the operating efficiencies that come with that—should help it weather the macro storm. Alibaba announced an unprecedented restructuring in March, a bid to unlock value for shareholders punished by years of stock-price declines, which marks a monumental shift from technology conglomerate to holding company.

While the company’s latest results for the June quarter characteristically did not include forward guidance to assuage concerns about the macro backdrop, there were encouraging signs that efficiency is at work.

A top-line revenue recovery was largely thanks to the core Chinese e-commerce business that may have otherwise suffered from a slowdown in consumption, with aggressive customer acquisition helping platform Taobao increase its user base. A bottom-line bump was helped by costs as a percentage of revenue down 6% year over year, likely at least in part as a result of a string of layoffs.

“While Alibaba continues to face pressure related to the macro and lingering pandemic impacts, the relative stability of the June quarter helped to highlight solid execution,” Shyam Patil, an analyst at Susquehanna, wrote in a Thursday note. Patil rates Alibaba at Positive with a price target of $160, slightly below the consensus of around $138.50 among analysts surveyed by FactSet. Alibaba stock closed Wednesday at $93.65.

“Though macro concerns remain and we could see periods of volatility, we continue to see the restructuring as a potential long-term value driver,” Patil said. “Alibaba remains, in our belief, the main China e-commerce player and continues to see a large secular growth opportunity.”

Write to Jack Denton at [email protected]