Chinese billionaire and founder of Alibaba Group Holding (NYSE:BABA) Jack Ma has been all over the news lately, but for all the wrong reasons.
Ma and his financial holdings, which include large stakes in Alibaba and Ant Group, have been under attack by the Chinese Communist Party (CCP) ever since he gave a controversial speech in October. At that time at a conference in Shanghai with a number of Chinese political and financial bigwigs in attendance, Ma slammed the Chinese regulatory establishment, saying it operates with a "pawnshop" mentality. He mocked financial bureaucrats for obsessing over risk to the detriment of innovation.
Chinese regulators were stung by the remarks and have responded personally against Ma, first blocking Ant Group's IPO in November, which was set to be the biggest in the world, and then on Dec. 24 when Chinese authorities announced an antitrust investigation into Alibaba, which sparked a sell-off that wiped $100 billion off of the company's market cap.
In recent days, there have been reports that Ma is "missing," but various sources have confirmed that he is laying low to avoid further public scrutiny.
For investors, the key question now is what all the intrigue around Ma means for Alibaba stock.
What you should know about Jack Ma and Alibaba
Jack Ma's reputation and fortune are inextricably linked to Alibaba, the tech giant and powerhouse in e-commerce, cloud computing, and digital payments. However, investors should be aware that Ma no longer holds a formal position in Alibaba, other than being one of 36 people that nominate a majority of the board of directors. He stepped down as chairman of the company in 2020 and has not been CEO since 2013.
In that sense, any pressure on Ma won't impact Alibaba directly, but the CCP's potential efforts to squeeze Alibaba, such as the antitrust investigation, could weigh on the stock. Alibaba shares fell 13% on that announcement, but the stock soon recouped some of those losses as it became clear that a breakup of the tech giant was highly unlikely, given that doing so would be against China's own interests. The move by the CCP seemed to be more about saving face following Ma's speech at the summit, and the CCP aimed at reasserting its power over a tycoon that has loomed large over both Chinese business and culture.
Damaging Alibaba significantly would be at odds with the CCP's own goals of making China the world's biggest economy and gaining global influence. Alibaba plays an important role in both regards. It owns the world's biggest e-commerce marketplace, bringing in more than $1 trillion in gross merchandise volume annually, and it's an important partner for global brands like Nike and Starbucks. Hurting Alibaba, therefore, would make China less appealing to international and multinational enterprises, and the government is looking to avoid a further backlash after a number of American companies moved manufacturing operations out of China following the earlier trade war.
Chinese stocks already trade at a discount to their American counterparts because of concerns about the communist government, which censors speech and can crack down on companies at will for what would be minor infractions in the U.S. In 2018, Alibaba shares fell on fears around the trade war with the U.S., and the U.S.-China relationship remains a risk, especially amid threats to delist shares of Chinese stocks from U.S. exchanges if they don't comply with certain oversight rules. Just this Thursday, Alibaba shares fell on a report that the exiting Trump administration could add the company to a blacklist of Chinese companies banned from U.S. investors. However, the outgoing administration will ultimately have little long-term say in the matter.
Considering Alibaba's current valuation, however, the risks of the backlash against Ma and further regulatory action against the company seem sufficiently priced in. This is a company that has a level of market power and competitive advantages in China on par with Amazon in the U.S., yet it trades at a price-to-earnings ratio of just 25, significantly less than the S&P 500 at 38. In its most recent quarter, Alibaba's revenue jumped 30% to $22.9 billion, and adjusted operating income rose 44% to $4.4 billion, showing the company's enviable profit margins. Additionally, its cloud-computing division saw 60% revenue growth in the quarter to $2.2 billion. Based on those numbers, Alibaba would likely be worth double or even triple what it is today if it were an American company.
A useful comparison
In 2018, Richard Liu, the CEO of JD.com (NASDAQ:JD), Alibaba's chief e-commerce competitor, was arrested on accusations of rape in the U.S. JD stock sank over the subsequent months as investors fear a potential conviction and the unraveling of the company he tightly controlled. Like Ma, Liu stepped back from public appearances for several months. Eventually, prosecutors dropped the case, lifting a dark cloud over Liu and JD. Since then, JD shares have racked up gains of more than 300%, riding a similar wave of growth in e-commerce as Alibaba.
The lesson for Alibaba investors, therefore, seems to be that there are risks from the CCP's current actions against Ma and the company, but the investor response seems overblown. Alibaba is a leading tech giant in a country set to become the world's biggest economy in the next decade, but it's being valued as a stodgy company in a slow-growth industry. That looks like a mistake. Investors may want to take advantage of the current discount.