Alibaba: Fall to Zero or Rise to the Moon?

China’s e-commerce giant Alibaba Group (BABA) is no stranger to controversy — from sexual assault allegations to its mysterious CEO. Not to mention the fact that China’s eagerness to intervene with how tech companies in the country operate and how has scared many investors away.

In fact, these fears have brought BABA’s stock price down more than 50% from its previously reported record highs. Despite being a wildly successful company, many investors still shy away from investing in Alibaba. So, will Alibaba fall to zero or rise to the moon? 

 

Alibaba is China’s — and according to some metrics, the world’s — largest e-commerce company. Alibaba comprises many divisions:

1. Taobao
2. Tmall
3. Freshippo
4. AliExpress
5. Lazada
6. alibaba.com
7. 1688
8. YouKu
9. ele.me
10. DingTalk
11. Alimama
12. Alibaba Cloud

Hundreds of millions of users across the globe access Alibaba’s businesses, transacting with millions of merchants.

In the fourth quarter of 2021, revenue at Alibaba totaled more than $38 billion, a 10% increase year-over-year as China’s e-commerce market grew 7% YOY.

Alibaba’s Ecosystem saw 1.28 active billion customers throughout the course of 2021, an increase of about 43 million from the year prior; 979 million of those consumers were in China, with an additional 301 million in other parts of the world.

Operations income decreased 86% in the final quarter of 2021, dropping to $1.109 million. The company attributed this loss to a $3.945 million digital media and entertainment “impairment of goodwill.” They attest that if it wasn’t for that, income from operations would have been $5.5 billion, a 34% decrease YOY.

Pros of Investing in Alibaba

The investment thesis for Alibaba sounds great on paper — the leading e-commerce company in China, the world’s second-largest economy. At a glance, here are the pros of investing in Alibaba:

The Stock is a Bargain

Shares of BABA are currently trading at low single-digit price-to-sales-ratios, and for much less than its stiffest competitors like Amazon and MercadoLibre.

BABA’s price-to-earnings ratios have slid to their lowest levels since 2016. Some investors, like Charlie Munger, are scooping up large chunks of shares based on the valuation thesis – it’s severely undervalued using conventional fundamental analysis. 

BABA Dominates China

Despite recent shortcomings, Alibaba still dominates the e-commerce market in China, with a more than 50% share. In fact, many people refer to Alibaba as the “Amazon of China.”

BABA’s influence in China is seen through an array of business segments, including:

• Logistics
• Wholesale
• Retail marketplaces
• Cloud computing
• Innovation initiatives
• Venture investments
• Digital media and entertainment

When you consider how large china’s e-commerce market and economy are, it’s easy to see why plenty of investors are still banking on BABA to generate significant returns down the road.

Cons of Investing in Alibaba

Some of the most significant cons of investing in Alibaba include:

Increasing State Control

Alibaba’s number one problem — and the top reason investors like Cathie Wood are becoming increasingly wary of investing — is the government’s rising influence on BABA’s platforms and operations. The communist nation is amping up its efforts to rein in the power big tech companies have in the country.

In fact, the government recently blocked Ant Group’s IPO for Alipay — the country’s largest digital payments platform — a business BABA owns a 33% stake of.

Insiders say the IPO had the potential public market valuation of $310 billion. But, not before Chinese regulators could step in and suspend the IPO, forcing Ant Group to restructure and split its payment platform — subjecting it to even harsher oversight. In turn, billions of dollars in value were destroyed in what was supposed to be BABA’s $100 billion stake.

What’s more, BABA has recently battled it out with the Chinese government, racking up a $2.8 billion fine for antitrust violations.

China’s Slowing Economy

As with every other nation and economy, the pandemic had a big on Chinese business too. But, China’s economy is not recovering as it expected. This slowdown could have an even more significant and lasting impact on Chinese consumer spending, as implied in BABA’s recent earnings report.

Alibaba’s commerce revenue grew 7% YOY to $27 billion in the fourth quarter of 2021 — a dramatic downturn from the 38% YOY growth it posted in the fourth quarter of 2020. 

As investors wait to see if things snap back to the way they were before, slowing growth definitely won’t help BABA reach a higher valuation.

Potential U.S.-China Tensions

The Russia-Ukraine conflict has escalated global tensions, while some believe China is growing increasingly aggressive toward Taiwan, the planet’s largest semiconductor exporter. The U.S. would likely support Taiwan if a conflict between the two nations were to pop up.

Retaliation would probably come via sanctions or even de-listing Chinese stocks from American stock exchanges. Of course, at this point, it’s nothing but speculation, but it’s worth mentioning and keeping your eye on.

What’s more, the United States recently launched an investigation into Alibaba Cloud for potential national security risks, centered around Alibaba’s data storage practices for American clients. The investigation could lead to regulatory action against Alibaba cloud, including the potential for a U.S. ban.

Alibaba: To The Moon or Zero?

With all of the recent negative press and the last earnings report, it’s not looking like BABA is a strong buy for the time being. There are also outside risks to consider, including the Russia-Ukraine conflict, making investments into BABA too much of a dice roll.

At the very least, you should invest cautiously and modestly in BABA until a clearer picture can be painted of the company’s future.

One person who’s not backing down from BABA is Charlie Munger, a longtime friend of Warren Buffett. Why Did Charlie Munger Buy Alibaba? In a word. Valuation.

His investment firm nearly doubled its stake in BABA two times in 2021. In late 2021, he owned 602,060 shares of BABA, worth about $71.5 million!

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.