Will Alibaba Stock Recover?

A company’s fortunes can change pretty quickly when the worlds of high finance and politics come crashing together.

Indeed, that fact’s never been more true than it is today. Throughout the past year, the Alibaba Group, a global technology and e-commerce platform, has witnessed a significant 25% decline in the value of its stock.

However, following this unforeseen downturn, investors and observers have raised concerns about the factors that may have precipitated the apparent collapse of this once illustrious symbol of Chinese prominence.

With that in mind, let’s delve into the reasons behind this dramatic undoing, exploring the impact of regulatory crackdowns, economic slowdowns, and the potential avenues for recovery.

Why Has BABA Fallen So Far?

The decrease in Alibaba’s share price throughout the previous year can be ascribed to a convergence of factors, each contributing to the unpredictability surrounding the company’s prospects.

First and foremost, the regulatory clampdown by the Chinese government has played a substantial role. China’s State Administration for Market Regulation (SAMR) has been especially proactive, imposing penalties on Alibaba and other famous technology behemoths for contraventions of anti-monopoly regulations.

For example, in July 2023, the Ant Group, a financial technology company established by Jack Ma and an associate of Alibaba, faced a penalty of around 7.1 billion yuan – roughly $985 million – from China’s foremost commercial regulatory authorities. This fine formed part of the continuous scrutiny by regulatory bodies, which has played a substantial role in the decrease of Alibaba’s stock value.

Moreover, the Chinese government’s broader campaign against monopolistic behavior in the tech sector has also affected Alibaba. This campaign began in late 2020 with the suspension of the high-profile IPO of Ant Group and continued throughout 2021, with a series of government investigations resulting in a total of 98 fines imposed on major internet and platform-based companies.

In addition, the Chinese government has been revising its Anti-Monopoly Law to showcase its opposition to domestic monopolies. Commencing on August 1, the highest penalty for undisclosed mergers will surge to 5 million yuan, tenfold the earlier fine. This signifies a more rigorous regulatory landscape for technology enterprises in China, further intensifying the scrutiny of Alibaba.

And finally, the “Common Prosperity” initiative of the Chinese government, striving to diminish wealth disparity, has resulted in heightened examination of technology enterprises. The astounding proliferation of China’s technology industry has been recognized as a contributing element that exacerbates wealth inequality, and the administration’s endeavors to curtail advancement have compounded the difficulties confronted by corporations such as BABA and its peers.

An Interesting Fiscal Period

Alibaba recently released its financial results for the latest quarter, and, despite a challenging macro environment, the company managed to close the fiscal year with some notable achievements.

For instance, its revenues for the three months ended March 31, 2023, reached RMB208,200 million, marking a rather underwhelming annual growth of just 2%. However, the firm’s adjusted EBITA was approximately $3.68 billion, representing a massive year-on-year uptick of 60%.

Highlighting the challenges and opportunities in the current economic climate, the company’s CEO, Daniel Zhang, sees potential in China’s post-pandemic consumption recovery. Furthermore, with the rapid development of artificial intelligence, the company plans to continue executing its three main consumption, cloud, and globalization strategies in response to these opportunities.

Alibaba: Restructuring The Cloud Business

The spin-off of Alibaba’s Cloud Intelligence Group is a significant step for the enterprise, which carries consequences for both the conglomerate and its stockholders.

The decision – unveiled officially in May 2023 – is part of BABA’s attempt to freshen up its organizational and governance framework and divide the conglomerate into six key business units, each overseen by an autonomous chief executive officer. Five of these units, including the Cloud outfit itself, will be free to secure outside funding and pursue their own initial public offerings.

It is hoped, therefore, that the separation of the ultra-intelligent AI Platform could unlock significant value for those associated with the firm. For example, as a component of the reorganization, the Group plans to establish itself as a unique entity listed on the stock market, and shareholders of Alibaba will be granted ownership in this novel venture.

This maneuver can enhance the worth of the company’s investors by enabling each division to concentrate on its fundamental strengths and expansion tactics, subsequently enhancing operational effectiveness and financial gain.

The resolution to spin off the cloud wing and other departments can also be seen as a strategic move by Alibaba to appease regulatory authorities and reduce the appearance of monopolistic practices. By breaking up the individual components of its business, it should appear less monopolistic, thus aligning more closely with the Chinese government’s policy goals. This move could also help BABA to exploit some of these untapped revenue streams and improve its overall market valuation.

Is BABA A Buy?

Alibaba’s stock has been trading within a set range for a considerable period, fluctuating between $80 and $90 for several months. Despite this, the company’s stock rallied 8% recently following the announcement of the Ant Group fine, which was actually lower than anticipated. However, this surge failed to set any new heights and only brought the stock back to the upper end of its previous spread.

That said, the firm’s shares have been changing hands at attractive multiples recently, including an 11.5x adjusted forward earnings ratio, 8.75x free cash flow, and, perhaps most appealingly, at just 1.61x its trailing twelve-month sales.

It’s a similar story regarding BABA’s bottom line metrics, too, with a Consumer Discretionary sector-busting net income margin of 8.38% and an equally excellent levered FCF fraction of 12.9%.

These figures compare favorably to other North American tech stocks, making Alibaba appear decidedly cheap.

Conclusion

Although Alibaba’s stock has faced significant challenges, the company’s recent financial performance and strategic initiatives suggest the potential for recovery is good. Moreover, the firm’s commitment to enhancing operational efficiency, optimizing costs, and executing strategic transformations could position it well for future growth, making its currently depressed share price valuation an obvious entry point for investors interested in the sector.

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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.