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Why Is Everyone Talking About Alibaba Stock?

By Leo Sun - Jul 15, 2021 at 9:10AM

Key Points

  • Alibaba is China’s top e-commerce and cloud company by a mile.
  • Alibaba's stock initially seems undervalued relative to its growth.
  • Unfortunately, the regulatory headwinds Alibaba faces justify its current discount.

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The Chinese tech giant is dominating headlines for all the wrong reasons.

Alibaba (BABA -0.10%) is arguably China's most well-known tech company. It owns the country's largest online marketplaces, Taobao and Tmall, and its largest cloud infrastructure platform, Alibaba Cloud.

Alibaba went public in September 2014 and it remained a solid growth stock over the next six years. The stock was initially priced at $88 a share, started trading at $92.70, and hit an all-time high of $319.32 last October. Since then, Alibaba has shed more than a third of its value as it dominated the headlines for all the wrong reasons.

Let's see why everyone is talking about Alibaba -- and whether or not it will ever recover.

Alibaba's corporate campus in Hangzhou, China.

Image source: Alibaba.

The aftermath of China's antitrust probe

Most of Alibaba's decline can be attributed to China's antitrust probe of the company, which started last December and concluded this April with a record 18.23 billion yuan ($2.82 billion) fine and new business restrictions. China's State Administration for Market Regulation (SAMR) launched the probe in response to complaints about Alibaba's exclusive deals with big brands, which prohibited them from listing their products on rival e-commerce sites.

Alibaba absorbed the fine, which was equivalent to 2.5% of its revenue and 12.1% of its net income in fiscal 2021, in the fourth quarter of the year.  On its own, the fine won't significantly impact Alibaba's long-term growth.

But the SAMR also forced Alibaba to end its exclusive deals, and levied additional fines against the company over previously unapproved acquisitions. Those fines were much lower, with penalties of just 500,000 yuan ($77,224) per violation, but they could prevent Alibaba from expanding its retail and cloud ecosystems with more acquisitions in the future.

These new restrictions could make it easier for smaller e-commerce competitors, like JD.com (JD 0.19%) and Pinduoduo (PDD -1.65%), to pull shoppers away from Alibaba's marketplaces. They could also give smaller cloud infrastructure competitors -- including Huawei, Tencent (TCEHY -1.52%), and Baidu (BIDU 0.70%) -- a chance to catch up.

It's still tough to challenge Alibaba's entrenched e-commerce and cloud businesses, but these uncertainties are casting some doubts on analysts' expectations for 30% sales growth this year.

Jack Ma and Ant Group add to uncertainty

Two other storm clouds are hanging over Alibaba as well: the abrupt downfall of its co-founder Jack Ma and the uncertain future of his fintech company Ant Group.

Ma hasn't been Alibaba's CEO since 2013, and he resigned as its chairman in 2019. However, Ma is still considered the face of Alibaba and is more widely recognized than its current CEO Daniel Zhang.

A person makes a payment by scanning a QR code with a phone.

Image source: Getty Images.

So when Ma angered the Chinese government by criticizing the country's banking system last October, the consequences hurt Alibaba. The government retaliated by suspending Ant's IPO in November, which doused Alibaba's hopes of profiting from its 33% equity stake in Ma's company.

The government also proposed to regulate Ant Group's Alipay and Tencent's WeChat Pay, which hold a near-duopoly in China's online payments market, as financial institutions.

Those new restrictions could prevent Alibaba and Tencent from using their affiliated payment platforms to tether retailers and other businesses to their sprawling ecosystems.

On their own, the actions against Ma and Ant won't derail Alibaba. But along with the antitrust probe and new business restrictions, they indicate the Chinese government plans to cap Alibaba's long-term growth.

Charlie Munger's controversial comments

Many U.S. investors criticized China's actions against Jack Ma, but Charlie Munger -- the celebrated investor who bought a large stake in Alibaba through Daily Journal (DJCO 1.26%) earlier this year -- recently took the opposing view.

In a CNBC interview, Munger called Ma "arrogant" and said the "Communists did the right thing" to rein him in. Those controversial comments might have made it tougher for U.S. investors who don't share Munger's enthusiasm for Chinese regulations to buy Alibaba's stock.

There are stock delisting threats in the U.S.

Last December, the U.S. passed a law that will delist shares of foreign companies that don't comply with tighter auditing standards within the next three years. Those companies will also need to prove they aren't owned or controlled by a foreign government.

Alibaba, JD, Baidu, and many other Chinese tech companies have already filed secondary IPOs in Hong Kong in response to those threats, which strongly suggests they won't comply with new U.S. audits.

China also reportedly wants to crack down on the VIE (variable interest entity) model, which enabled its top tech companies to skirt restrictions on foreign investments in sensitive sectors. VIEs are holding companies based in proxy countries, like the Cayman Islands, and list their shares on U.S. exchanges.

If China closes this so-called loophole, most Chinese companies will no longer be able to go public on U.S. exchanges. The ones that are left here, like Alibaba, would also seem to be trading on borrowed time.

The key takeaways

I recently told investors to avoid Chinese stocks until all these regulatory headwinds wane. That won't happen anytime soon, so Alibaba still can't be considered a bargain at 18 times forward earnings.

Leo Sun owns shares of Baidu and JD.com. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Baidu, JD.com, and Tencent Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$94.77 (-0.10%) $0.10
Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$140.36 (0.70%) $0.98
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$38.44 (-1.52%) $0.59
Daily Journal Corporation Stock Quote
Daily Journal Corporation
DJCO
$272.50 (1.26%) $3.40
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$57.05 (0.19%) $0.11
Pinduoduo Stock Quote
Pinduoduo
PDD
$48.80 (-1.65%) $0.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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