Alibaba: can be driven by multiple catalysts
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Our Equity Top Pick List
We have updated our Equity Top Pick List to reflect the events of the past quarter. The list includes those stocks, typically US and European ones, that we consider to be proper investment choices from a fundamental point of view. It can provide a starting point for building a sector-diversified equity exposure in portfolios, but can also be used as a watch list. Technical analysis should be used to time / determine the specific investment decision.
Could the momentum return in the semiconductors?
The semiconductor sector has had a challenging quarter, with its performance in recent months lagging behind improvements in underlying fundamentals, even as AI-driven demand remained exceptionally strong. The accelerating adoption of AI by enterprises and the proliferation of AI agents are significantly increasing the demand for computing capacity, which points to a further surge in cloud services and data center investments. Given current supply constraints, record-high backlogs, and higher-than-expected investment needs, we expect further upward revisions to earnings forecasts in the semiconductor industry. Nevertheless, the sector’s valuation appears favorable from a historical perspective, which, in our view, could result in a more attractive risk-return profile in the coming months.
We can identify several catalysts surrounding Alibaba that could help revalue its still depressed shares compared to Western technology companies, in the period ahead. Due to the company's strong fundamentals, it has been on our top pick list for quite some time, and as was the case last summer, we now also see a favorable technical situation that is why we open a shorter-term, trading-oriented long position. It is important to emphasize that political noise in the markets is very strong nowadays, causing higher volatility, which also poses a significant risk to our trading position and should be taken into account when sizing our position.
Several catalysts can help with repricing
Since the Trump-Xi agreement last November, there has been a steady thaw in US-China relations, with the Americans recently giving the green light for Nvidia to export its older H200 chips to the country, although this is still being blocked by the Chinese side. As China remains indispensable for the US due to its imports of rare earth metals, which remain the case at least until 2027-28 (by which time investments by US allies and domestic substitutes may come to fruition), there is little chance of a serious escalation between the parties for the time being. Moreover, the US is clearly preoccupied with other issues at the moment (Greenland, Europe, Venezuela, Iran), but it is doing so in a way that often frightens the investment community, which, combined with the weakening of the dollar, may sustain capital flows towards emerging markets. All of these factors could also contribute to a revaluation of Chinese assets in the coming months.
Although the company's latest quarterly performance was not convincing, and fierce competition in the Chinese e-commerce market is likely to have kept profit generation under pressure in recent months. Investors have now certainly digested/priced in the related negative factors, which are considered temporary. In addition, following a series of warnings, the Chinese authorities took action at the beginning of the year and intend to put an end to the price war with regulatory measures from February onwards. On the one hand, this could start to have a positive impact on Alibaba's e-commerce earnings, and on the other hand, investor attention could increasingly shift to cloud services, which are experiencing particularly strong growth, and AI-related services, helping to revalue the stock.
The AI-related investor narrative could be reinforced if the Chinese authorities finally partially lifted their continued ban on the import of Nvidia chips, as Alibaba would be a major buyer. According to press reports, the company plans to float its in-house chip manufacturing division on the stock market as part of an IPO, although the timing of this is still uncertain. Based on the assumption that the restructuring of the division would be the first step, the spin-off itself may be further away (i.e., we will probably only find out later how much of the significant AI investments can be monetized), but from a trading perspective, even this "rumor" is helpful, as it also reinforces the AI narrative.
Technical picture
The stock has been on a steady upward trend for a year, with rising waves starting after correction phases. A new rise may have started at the beginning of the year, which may be reinforced by the fact that the stock easily weathered the market turmoil of the past few days and did not die out. There is very strong support around the 150 level, there is room for upward movement, trading data is also favorable, and accumulations can be seen. As a result, we are opening a long position around 175.5 and setting the risk at the breakout level (160). We set the target price at 212 based on previous upward waves. The expected risk/return ratio of the position is 2.35.
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