David Becker/Getty Images News
Morgan Stanley removed Alibaba (NYSE:BABA) as its top pick but maintained an Overweight rating, as did Barclays Capital after the company scrapped the planned spin-off of its cloud business.
Alibaba's stock dipped about 2% at market open on Friday, while several other Chinese stocks were largely flat: JD.Com (JD), Bilibili (BILI), Baidu (BIDU), PDD Holdings (PDD).
Morgan Stanley's analysts said that their top pick thesis for Alibaba has become stale; shift to Tencent (OTCPK:TCEHY) (OTCPK:TCTZF).
The analysts noted that on Jan. 8, they made Alibaba their industry top pick considering — customer management revenue, or CMR, turnaround through consumption recovery; cloud re-acceleration; and solid shareholder return and capital management execution.
However, the analysts are now seeing a shortfall in all three areas: a slower-than-expected macro recovery with ongoing e-commerce competition; bumpy cloud revenue re-acceleration in the near term; and negative surprise on cloud IPO. Thus, they have lowered their F25-30 revenue and non-GAAP net profit estimates 2%-8% and 5%-18%, respectively, and lowered the price target on the stock to $110.
Barclays Capital reiterated its Overweight rating on Alibaba (BABA) and maintained its price target of $138, noting that the highly anticipated cloud IPO removed a near-term catalyst for unlocking value, disappointing investors. The analysts consider it could be the right decision to make, although an unpleasant one for the company's new senior leaders, who remain committed to returning shareholder value through buybacks and now annual dividends.
The analysts said that September quarter results were in line but that seems less relevant now. Newly appointed senior leadership announced that the company was no longer pursuing a full spinoff of Cloud Intelligence Group, for which Barclays has an estimated value of about $40B.
The negative impact from the U.S. chip ban was cited by the company as the main reason for the change of heart. Many investors were disappointed, since a core part of their investment thesis in Alibaba (BABA) has been around the potential unlocking of value through the spin-off of valuable subsidiaries, with the cloud being the most valuable.
The analysts added that with all the regulatory uncertainties in the U.S. and China, on top of limited access to the most advanced chips, it may turn out to be the right decision in the longer term, and management of its cloud business can now focus more on building and growing the business than dealing with regulatory issues.
Besides the decision to cancel the cloud IPO, management has stepped up its effort to increase shareholder returns by declaring annual dividends ($2.5B in total) for the first time. These dividends are in addition to aggressive share buybacks ($3B bought back in the last four months), the analysts added.
While the analysts hoped that the cloud IPO would be the key catalyst for the shares, they remain convinced that Alibaba's (BABA) aggressive share repurchases and now dividends would make the company's stock highly attractive to long-term holders.