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Alibaba’s stock is ‘still very cheap,’ but Bernstein now wonders if it’s a value trap

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Alibaba Group Holding Ltd. shares might be a “value trap,” according to an analyst who just downgraded them.

Bernstein’s Robin Zhu acknowledged that Alibaba shares
9988,
+2.64%

BABA,
+0.65%

are “still very cheap,” but he worries that competitive issues and a tough marketing climate will make it difficult for them to appreciate from here. He cut his rating on the shares to market perform from outperform late Monday, while lowering his price target on the American depositary receipts to $98 from $130.

More from MarketWatch: Alphabet stock downgraded again as Google moves ‘from too slow to too fast in AI’

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“We upgraded Alibaba a year ago on the basis that the stock had discounted perpetual low growth, and that reopening would help support growth via better category mix,” Zhu wrote. “Alibaba’s shares have traded in a range since — but while they remain cheaply valued, perpetual low growth no longer feels like an aggressive bear case.”

While Zhu wrote that he sees the potential for Alibaba to better its growth in gross merchandise volume during the June quarter, he expressed concerns about “anemic marketing spend intentions,” based on feedback from Alibaba merchants. His latest talks indicated that merchants are more inclined to spend on rival platforms PDD Holdings Inc.
PDD,
-0.32%

and Douyin.

“Quarterly [comparisons] get harder from here, which we worry contributes to value-trap risk,” Zhu continued.

He noted that he was “unconvinced that low multiples and modest EPS [earnings per share] accretion can drive durable share price performance if the competitive problem in core e-commerce remains unresolved.”

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Alibaba is in the midst of a big transition, with plans to spin off its cloud-computing business and shake up the leadership of the company that remains. The spinoff is particular is designed to unlock shareholder value, with the thinking being that various units of Alibaba’s sprawling enterprise could come to fetch higher valuations on their own.

Don’t miss: Alibaba’s Zhang to step down as CEO, chairman amid business shakeup

Zhu said he isn’t quite sure how the move will play out.

“On the Cloud spin-off our main questions relate to the appropriate discount related to potential US sanction risk, private sector business sentiment, and … how many Alibaba shareholders will want to sell on day one,” he wrote. He recently lowered his target multiple for that part of Alibaba’s business, noting that 30% of it relates to private or hybrid cloud services, an area that could continue to weigh on growth and margins.

Read: Why Alibaba’s business shakeup isn’t helping its stock

Alibaba is interested in spinning off its Cainiao logistics business and its Freshippo grocery business as well, but Zhu was doubtful that investors “will give much credit” to those entities.

See also: Alibaba management shake-up positive as Zhang can now focus on cloud ahead of spinoff, say analysts

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