Buy the dip in Alibaba? Here’s what the analysts say, after the stock tanked

Published Sun, Nov 19 20237:44 PM ESTUpdated Mon, Nov 20 20237:01 AM EST

Shares of Chinese e-commerce giant Alibaba tumbled around 10% last week after the company scrapped plans to spin off and list its cloud computing business. While investors have largely reacted negatively to the news, which was announced alongside quarterly earnings Thursday, Wall Street's analysts are split. While Morgan Stanley ripped off its "top pick" label on the stock, Barclays said Alibaba may have taken the "right decision" in shelving the break-up plans. BABA YTD line What the analysts are saying: Morgan Stanley Morgan Stanley swiftly dropped Alibaba as its top pick in the internet sector. The bank cited a number of reasons for the decision including a "negative surprise on cloud IPO". The bank said the shock move makes its investment thesis "stale," prompting it to shift its top pick to Tencent instead. "Uncertainty about consumption recovery and cloud reacceleration along with backtracking on Cloud spin-off lead us to remove BABA as our top pick," said Morgan Stanley's analysts led by Gary Yu in a note to clients on Nov. 16. Although the Wall Street bank reiterated its overweight – or buy – rating on the stock, it lowered its price target to $110 from $125. The new target points to upside potential of around 42% for Alibaba's U.S. listed shares. Bernstein Bernstein analysts were equally scathing, describing Alibaba's earnings report as "lackluster" and said canceling the cloud spinoff exacerbates its "credibility problem" with investors. They also said another quarter of "anaemic" growth for Alibaba's core platforms shows the headwinds facing the business. The analysts added that canceling the cloud IPO right after announcing plans to better reward shareholders undermines confidence in management initiatives. "Cancellation of the Cloud spin-off came out of the blue, and puts paid to the last big 'initiative' supposed to improve shareholder returns. Coincidence or not, the fact two Form 144's filed a day before earnings captured as much attention as the Q2 numbers illustrates the task facing management to get investors to re-engage," Bernstein said. The investment bank cut its price target of $100 to $93. Barclays In contrast to its peers, Barclays said the move to scrap the spin-off plans could ultimately be the "right decision" given all the regulatory uncertainties. The Wall Street bank cautioned, however, that the IPO cancellation would be "disappointing" to investors as it removed a near-term catalyst for unlocking value. "BABA scrapping its widely anticipated cloud IPO removes a near-term catalyst for unlocking value, disappointing investors," said the bank's analysts led by Jiong Shao. "We consider it could be the right decision to make, although an unpleasant one for BABA's new senior leaders, who remain committed to returning shareholder value via buybacks and now annual dividends." The bank praised Alibaba's "aggressive" share repurchases, with $3 billion bought back in just the past four months. It also noted the $2.5 billion in newly announced annual dividends. Barclays reiterated its overweight rating and $138 price target on the stock, saying the new focus on dividends and buybacks can still make Alibaba shares attractive for long-term investors. JPMorgan JPMorgan analysts noted the Alibaba's cloud business missing growth estimates and a modest decline at its core business will worry investors. While applauding the newly announced dividend, JPMorgan said it won't be enough to offset investor disappointment over the aborted cloud spinoff plan. The Wall Street giant has a $150 price target on the U.S. listed stock, which represents around 93% upside potential. — CNBC's Michael Bloom contributed to this report.