Summary

• Alibaba stock has surged over 55% in the past month, potentially entering a Stage-2 ascent, with further gains expected if it holds above the top-end of its accumulation base.

• Despite negative revenue and EPS revision trends, Alibaba is set to extend its top-line growth re-acceleration trend in Q3 FY-2025 and end its y/y EPS declines.

• Amid significant macroeconomic headwinds, Alibaba's near-term business outlook remains uncertain. However, long-term growth prospects look strong, with TTG and Cloud set for a healthy recovery.

• Ahead of Q3, I continue to rate Alibaba stock a "Strong Buy" in the $120s due to highly-favorable long-term risk/reward.

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Introduction

In the lead-up to its Q3 FY-2025 report, Alibaba Group Holding Limited (NYSE:BABA) stock has rallied by more than +55% over the past month - potentially breaking out of a long Stage-1 accumulation base:

According to Stage Analysis, assets tend to experience sharp upward price moves during Stage-2, and that's precisely what BABA seems to be entering:

Stage Analysis (AlphaTarget)

Hence, despite treading water in "overbought" territory [weekly RSI > 70], BABA stock could be set to experience another significant leg up in upcoming months, especially if it manages to hold the accumulation base breakout level at $120 per share post-Q3 earnings.

In today's report, we shall preview Alibaba's upcoming quarterly report and re-evaluate its long-term risk/reward to make an informed decision on BABA.

So, What's In Store For Alibaba In Q3 FY2025?

According to consensus analyst estimates, Alibaba is expected to grow revenue by +6.1% y/y to $38.4B in Q3 FY-2025 - extending the top-line re-acceleration streak, with non-GAAP EPS projected to rise by +1.1% y/y to $2.68 per share - putting an end to a series of y/y EPS declines.

SeekingAlpha

SeekingAlpha

As you can see above, Alibaba's recent business performance has been somewhat wonky; however, underlying fundamental trends are improving, with a healthy growth recovery in Taobao & Tmall Group [TTG] and Alibaba Cloud underway.

As per Alibaba's CFO during the call, Toby Xu, recent strategic investments into TTG are starting to pay off in the form of improved monetization (emphasis added):

Our revenue growth this quarter was driven by improving monetization of Taobao and Tmall Group, which included GMV-based service fees and merchant adoption of our marketing tool Quanzhantui. Consistent with our strategy, we continue to invest in our core businesses while enhancing operational efficiency.

Furthermore, Alibaba's CEO, Eddie Wu expressed optimism about further acceleration in TTG growth, whilst also waxing lyrical about improving momentum in Alibaba's Cloud business (emphasis added):

This quarter we continued to invest in the user experience and strengthen product offerings to serve our consumers. We entered into long-term collaborations with industry peers to broaden payment and logistics services on Taobao and Tmall platforms, which we expect will accelerate our overall growth. Growth in our Cloud business accelerated from prior quarters, with revenues from public cloud products growing in double digits and AI-related product revenue delivering triple-digit growth. We are more confident in our core businesses than ever and will continue to invest in supporting long-term growth. Our other businesses continued to improve their operating efficiency, with most of them continuing to increase their profitability or reduce losses.

Source: Alibaba Q2 FY2025 Review: Opportunity Seldom Knocks Twice

Now, despite optimistic management commentary and positive AI developments [such as Alibaba launching Qwen 2.5 model, Apple reportedly partnering with Alibaba to bring AI to iPhones in China, etc.], Alibaba's revision trends for Revenue and EPS have been trending in the wrong direction, i.e., analysts have been lowering their numbers over the past three months:

SeekingAlpha

SeekingAlpha

Given the weak consumption environment in China, the negative revision trends should surprise nobody. That said, Alibaba's near-term revenue and EPS forecasts still point to a healthy growth acceleration.

Alibaba's Fair Value And Expected Return

Heading into its quarterly report on 20th February, Wall Street analysts remain bullish on BABA stock, with 7 out of 8 analysts covering Alibaba rating the stock as a "Buy" right now. With the sole remaining analyst rating BABA a "Hold" - there are no "Sell" ratings from Wall Street firms on BABA right now.

TipRanks

While the 12-month price target range for Alibaba is wide [$105-151], the consensus estimate of $129.13 implies an upside of just ~3% from current levels. However, using conservative assumptions for future growth and margins in our proprietary valuation model, we determined that BABA stock is worth way more than Wall Street consensus. Currently, TQI's fair value estimate for Alibaba is ~$217 per share, i.e., +74% from current levels.

TQI Valuation Model (Free to use at TQIG.org)

Now, predicting where a stock will trade in the short term is impossible; however, over the long run, a stock will track its business fundamentals and obey the immutable laws of money. If the interest rates were to return to artificially low levels (i.e., ZIRP), higher equity multiples would be justifiable. However, I work with the assumption that interest rates will eventually track the long-term average of ~5%. Inverting this number, we get a trading multiple of ~20x (P/FCF).

Assuming a conservative exit multiple of ~15x P/FCF (a “China” discount is embedded into this assumption), I think Alibaba's stock could be trading at ~$500 per share five years from now. This price target implies a 5-year CAGR return of ~32% and handily exceeds our investment hurdle rate of 15%.

TQI Valuation Model (Free to use at TQIG.org)

In light of Alibaba's recent price appreciation from the $80s to the $120s, BABA's 5-year expected CAGR return has dropped from ~44% to ~32%. While Alibaba stock is not as attractive as it was a month ago, it is still a "Strong Buy" based on our valuation process.

Concluding Thoughts: Is Alibaba Stock A Buy, Sell, or Hold?

Given Alibaba's previous attempt to break out of its Stage-1 accumulation base failed miserably, BABA's shareholders are likely a nervous bunch heading into the Q3 quarterly report. In recent quarters, Alibaba's business performance has been hit-and-miss on consensus expectations, and the pre-ER revision trends have been trending in the wrong direction. Hence, while I do not expect fireworks from Alibaba this quarter, I remain optimistic about BABA's medium-to-long-term prospects.

Key Takeaway: I continue to rate Alibaba stock a "Strong Buy" in the $120s.