Since November 2020, the shares of Alibaba Group Holding Limited (NYSE: BABA) have been trading in a downtrend, losing 65% of the price as a result. Despite several recovery attempts, they ended up in a new decline.

Even the news that Charles Munger was buying Alibaba shares failed to break the downtrend. As we know, Charles Munger is vice chairman of the board of directors at Berkshire Hathaway and a long-time affiliate of Warren Buffet. In Q4 2021, he almost doubled his position in the shares of the Chinese giant – to 602,060 shares. This represents 27.6% of the managed sum.

Also, the last quarterly report had a bad impact on Alibaba Group stock quotes: after it was presented, the stock lost 9% more. Is there a chance of recovery for these Chinese shares? Let's find out.

What we know about Alibaba Group

Alibaba is the largest Chinese company specialising in electronic commerce, retail sales, and technology. By using its predominance in the market of electronic commerce, the corporation started off by pushing sellers to work with its platforms only.

For example, if a seller was registered on a platform that was a rival of Alibaba's, the algorithms of the tech giant made the goods of that seller drop to the bottom of the search results page, which immediately affected sales volumes. This approach made the sellers hesitate to place their goods on other trading platforms.

The aftermath of the anti-monopoly investigation

After a regulator carried out an investigation of Alibaba Group's business, the corporation was obliged to pay a fine of 2.8 billion USD and change the rules for sellers. This brought some life to the sector, and rivals started extending their market shares in China. This affected the growth of Alibaba Group revenue almost at once.

The reports over the last three quarters show that revenues have never reached forecasts, and the speed of their growth slowed down noticeably. For comparison: in 2019, when the economy had not been influenced by the pandemic yet, revenue in Q4 reached 161 billion USD. This was 37% more than in 2018.

The Q4 2021 report demonstrated revenue growth by just 10%, compared to the statistics of the same period of 2020. EPS dropped 23%, reaching 16.78 USD.

Alibaba attempts to retain users

Note that the client base of the corporation kept increasing, reaching 1.28 billion consumers. The Company has stated that it has attracted almost all Chinese users with purchase ability. Now the task is to retain the loyalty of these users and increase the revenue stream from each of them.

Counting on foreign markets

There are many reasons for the stagnation of Alibaba's business on the Chinese territory. Firstly, regulatory measures still influence Alibaba's finances. Secondly, the China government is negative about the metaverse that the company is actively investing in. Thirdly, the Chinese domestic market has started to cool down.

As a result, the rivalry is noticeably growing while consumer activity is shrinking, and the government is putting pressure. A way out might be to develop the business outside China.

Alibaba CEO Daniel Zhang and his deputies agreed that strengthening their position in overseas markets should be the main goal for the nearest few years.

They are counting on such subsidiaries as Lazada (South West Asia), Trendyol (Turkey), and Daraz (South Asia). The long-term goal of the company is to serve 300 million users in these regions.

Interest in foreign markets does not mean that Alibaba should have to leave China to rivals. The company keeps investing actively in the development of the Chinese platform, attracting and retaining new users. While the company was previously applying pressure on sellers, it is now giving them special offers and discounts in an attempt to retain their loyalty.

What is going on with Alibaba shares?

By analysing the chart of Alibaba, we can see evidence of an end to the downtrend. The first thing to notice is the range between 110 and 130 USD in which the price has been trading since December 2021.

The trade volume in this range is also increasing. This means investors have gradually started to buy the shares. One more confirmation of the demand is that the shares have recovered quite fast after the quarterly report. On that day, the stock quotes broke through the lower border of the range and reached 100 USD, and by the end of the trading session, they managed to rise to 109 USD.

Alibaba Group share price chart
Past performance does not predict future returns.

The stock quotes have now returned to their old range.

Signals for the end of the downtrend:

  • A breakaway of the resistance level of 110 USD upwards, i.e. a return to the old range
  • A breakaway of the upper border of the range at 130 USD
  • An escape of the price from the descending channel, i.e. a breakaway of the descending trendline
Alibaba Group share price chart
Past performance does not predict future returns.

The beginning of an uptrend will be evident when the resistance level at 140 USD is broken. It is worth recalling here what the characteristic of an uptrend is: each next high is higher than the previous one. In this case, the previous high is 140 USD.

Alibaba shares have been falling according to the rules of a downtrend: since November 2020 the quotes have never risen over the resistance line, which meant no signals of a trend reversal. Take a look at the chart.

Alibaba share price chart
Past performance does not predict future returns.

There were formed 5 key resistance levels and neither of them was broken. This means the shares are going by the rules of tech analysis, which makes identifying the current uptrend easier.

Closing thoughts

Alibaba shares are considered underpriced, and market players used to be catching the bottom for the whole of the laFive resistance levels have been formed, and neither of them was broken. This means the shares are going by the ruleAlibaba shares had been considered underpriced in 2021, and market players were catching the bottom during the whole year. It is now obvious that the shares are continuing the downtrend also in 2022, renewing the lows.

This is a marketing communication and not investment research, therefore it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Material is prepared by

A trader since 2004, Eugene started actively investing on the US stock market in 2012. He now regularly publishes a variety of analytical articles about stocks on the RoboMarkets website and blog.