Mizuho sees margin pressure for Alibaba and JD, cuts target on both

Mizuho warns that intense competition in food delivery is significantly pressuring margins for Alibaba and JD.com, leading to substantial cuts in their Q2 EBITDA forecasts and revised price targets. The brokerage estimates both firms spent over 10 billion yuan defending market share in Q2, pushing profitability further out and prompting lower valuation multiples. Despite these near-term headwinds, Mizuho maintains Outperform ratings, viewing both companies as relatively defensive amidst China's macro uncertainty, supported by their core commerce and cloud businesses.

Analysis

A Mizuho research note highlights significant near-term margin pressure on Alibaba (BABA) and JD.com (JD) due to an escalating subsidy war in China's food delivery market. The bank estimates both companies spent over 10 billion yuan in the second quarter to defend market share, leading to substantial downward revisions in Q2 EBITDA forecasts; JD's estimate was cut from 15 billion to 4 billion yuan, while Alibaba's was lowered from 55 billion to 45 billion yuan. This intense competition is expected to continue into the seasonally strong third quarter, delaying the path to profitability for their respective local delivery units. Consequently, Mizuho has reduced its price targets to $149 for Alibaba and $42 for JD, and has shifted its valuation basis to lower multiples on EBITDA forecasts further in the future (2027-2028), reflecting these extended profitability timelines. Despite these headwinds, Mizuho maintains 'Outperform' ratings, framing both as defensive holdings amid macro uncertainty. The rationale is that Alibaba's current valuation primarily reflects its core commerce and cloud segments, leaving food delivery as potential upside, while JD retains a strong position in higher-value categories like electronics.

Key Decisions for Investors

• Investors should recognize the market is bifurcating the investment thesis between near-term margin erosion from the food delivery subsidy war and the long-term value of the core commerce businesses.
• Monitor for any regulatory intervention that could curtail the subsidy race, as this would serve as a positive catalyst for margin recovery and a potential re-rating.
• Given the more severe proportional impact on JD.com's forecasted EBITDA, investors may consider the relative risk-reward profile, as Alibaba's larger, diversified earnings base appears to better absorb the immediate financial impact.
• The shift in valuation methodology to later years suggests that a longer investment horizon is now required to realize value from the companies' local delivery ventures.