After running up strongly before earnings, for the second day in a row after earnings, shares of China's Alibaba (BABA 3.43%) are going down.
The Chinese e-commerce and tech stock lost more than 9% yesterday, and is drifting down another 2.2% Friday morning (through 10:40 a.m. ET). Wall Street continues to react to Alibaba's news that it beat earnings yesterday but is canceling its planned spinoff of its cloud computing and AI business, Cloud Intelligence Group (CIG).
NYSE: BABA
Key Data Points
Alibaba sales and earnings
The Fool's Jeremy Bowman gave us the details on Alibaba's report yesterday. In a nutshell, the news was that sales grew more than expected in Q3 2023 -- up 9% at $30.8 billion -- and earnings did better than expected as well, flipping from a year-ago loss to a $1.48 profit per American depositary share this time around.
However, the bad news was that Alibaba was expected to spin off its Cloud Intelligence Group in the near future, and investors were looking forward to getting rid of CIG -- perhaps because, at a revenue growth rate of just 2%, it was a relative laggard among Alibaba's several businesses. This plan has now been scuttled, with Alibaba explaining that "U.S. restrictions on export of advanced computing chips has created uncertainties for the prospects of Cloud Intelligence Group," decreasing the value of CIG were it to be spun off.
Is Alibaba stock a sell?
So now Alibaba has decided to keep CIG for itself -- slow growth rate and all -- and Wall Street isn't happy about that. So far this morning, ratings-watcher The Fly reports no fewer than six separate analysts have lowered their price targets on Alibaba, on top of the two analysts who cut their price targets last night.
HSBC noted that Wall Street had been counting on the CIG spinoff to unlock value in Alibaba stock, but is now worried about weakness in the Chinese cloud market. UBS pointed out that Alibaba founder Jack Ma has been selling shares. Morgan Stanley -- which cut Alibaba's price target more than most at $110 a share -- added that it's worried about consumption growth slowing Alibaba's retail sales.
For a whole variety of reasons, therefore, Wall Street is less optimistic about Alibaba stock today. And yet, it's worth pointing out that even the bankers who are cutting price targets today generally agree Alibaba is a buy. And even Morgan Stanley's relatively low $110 price target implies that Alibaba stock could go up 41% from here.
They may be right and they may be wrong. That being said, when I look at Alibaba stock trading for just 8.2 times free cash flow, with a boatload of cash on the books, and revenue growing a respectable 9%, I kind of have to agree: Alibaba's cloud business may not be going great, but Alibaba stock looks really cheap.
