Although Alibaba (NYSE:BABA) reported decent earnings last month, the stock failed to gain momentum and has underperformed the broader market in recent quarters. With international capital leaving China and geopolitical risks rising, Alibaba's stock may remain weak in the near future without significant catalysts to improve the situation. Therefore, I believe it makes more sense to look for opportunities locally rather than investing in Alibaba, which is still struggling with the consequences of the Beijing government-led crackdown more than three years ago.
Alibaba has struggled to maintain momentum in its eCommerce business due to economic difficulties in China. In the third quarter, its Taobao and Tmall divisions posted revenues of $18.18 billion, up only 2 percent from a year earlier. In contrast, competitor PDD Holdings recently reported an incredible 123 percent increase in revenues in the December quarter, thanks to its aggressive strategy to promote sales and attract new customers.
PDD Holdings' shares have already outperformed Alibaba's in recent years, and if it continues to grow at this rate, it will not be surprising if it soon becomes more profitable than Alibaba's core business.
However, Alibaba has also faced challenges in its cloud business due to increasing competition and geopolitical issues. In the December quarter, the cloud business posted revenues of $3.95 billion, a modest 3 percent year-on-year growth. By comparison, Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOG) had cloud revenues of $25.9 billion, $24.2 billion, and $9.19 billion respectively with strong growth of 20%, 13%, and 25.5%.
Despite Alibaba's steady growth, it is unlikely that it will soon threaten the dominance of Western companies in the cloud sector. In addition, growing domestic competition makes it difficult for the company to significantly improve its cloud business. For this reason, Western technology companies are likely to be a more attractive investment in the near future than Alibaba.
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Using Investing Pro, it is clear that we are dealing with a high-quality, undervalued stock. The main problem with Alibaba and the Chinese market in general is the lack of investor confidence. Although many stocks are currently at a discount, it would be prudent to wait for important signals, such as those from upcoming quarterly reports, before acting.
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As for Alibaba, I anticipate a stable market phase for the rest of the year. My strategy for this stock is based on buying after a positive quarterly and only if prices stay above the 100-day moving average, to get a buy confirmation from technical analysis as well.
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