Erste Group has adjusted its view on Alibaba Group Holding (NYSE: BABA), moving the stock from a Buy recommendation to Hold. The downgrade, announced on Tuesday, was driven by what the analyst described as a notable deterioration in operating margins and a marked increase in long-term liabilities.
Valuation and balance-sheet metrics
Alibaba trades with a market capitalization of $347.46 billion and a price-to-earnings ratio of 22.54. According to InvestingPro data cited by the analyst, that P/E sits low compared with the company's near-term earnings growth potential. At the same time, InvestingPro data show Alibaba retains a solid current ratio of 1.46, indicating that its liquid assets exceed its short-term obligations.
Reasons for the downgrade
Analyst Hans Engel identified two central concerns prompting the downgrade: contracting operating margins and a sharp rise in long-term liabilities. These trends, Engel said, weigh on near- to medium-term earnings quality and cash flow visibility. Despite the downgrade, Erste highlighted a positive outlook for Alibaba’s push into monetizing artificial intelligence through its cloud division and the development of proprietary AI chips.
Near-term outlook and earnings timetable
Erste Group said it expects Alibaba’s share price to trade sideways over the medium term given the balance of margin pressure and investment-led initiatives. The company is scheduled to report earnings on February 19, an event investors will likely watch closely for updated margin and liability disclosures.
InvestingPro's Fair Value assessment, referenced by the analyst, indicates the stock may be undervalued on that basis. Subscribers to InvestingPro can access eight additional ProTips and expanded financial metrics intended to help evaluate Alibaba's outlook in more detail.
Operational and market developments
Alibaba has announced a $431 million marketing investment to promote its Qwen AI application during the upcoming Lunar New Year holiday. The campaign is planned to include incentives aimed at dining, drinks, and entertainment in an effort to attract more users and intensify competition among the country’s major technology companies.
Separately, regulatory pressure has surfaced for one of Alibaba’s services. China’s transport ministry has summoned Alibaba’s Amap ride-hailing unit over concerns related to management and pricing, urging the company to lower commission fees and strengthen driver safety measures.
On the international front, the state of Texas has implemented a ban preventing state employees from using Alibaba products, citing privacy concerns tied to the Chinese government.
Brokerage views and Qwen adoption
Not all sell-side firms share Erste’s more cautious stance. Jefferies has reiterated a Buy rating on Alibaba, maintaining a price target of $225.00; Jefferies' view follows significant upgrades to the Qwen app that integrate core services across Alibaba’s ecosystem. Morgan Stanley has also affirmed an Overweight rating with a $180.00 target, calling out the rapid adoption of Alibaba’s Qwen AI assistant, which, the firm notes, surpassed 100 million monthly active users within two months of launch.
Bottom line
Erste Group’s downgrade to Hold reflects specific worries about margin contraction and growing long-term liabilities even as Alibaba doubles down on AI and cloud monetization. The company’s marketing push for Qwen and continued user traction present offsetting positives that other brokers have leaned on to maintain Buy or Overweight recommendations. Investors will likely weigh the company’s upcoming earnings and any further detail on liabilities and margin recovery plans when reassessing the stock.
Note: Financial metrics referenced above are drawn from InvestingPro data as reported by the analyst.