Alibaba (BABA -3.08%) became one of the most talked about tech stocks on Reddit's WallStreetBets subreddit in early October, according to the latest data from Quiver Quantitative. Does that buzz indicate the Chinese tech giant, which has lost nearly half its value over the past 12 months, is finally primed for a fierce rebound? Let's see why investors are getting excited about Alibaba again.
A big buy
In an SEC filing on Oct. 5, Berkshire Hathaway Vice Chairman Charlie Munger's Daily Journal Corporation (DJCO -0.36%) revealed that it had increased its position in Alibaba by 82% since July. Daily Journal bought 136,740 shares of Alibaba and raised its total stake to 302,060 shares, which is worth about $47 million today.
That big purchase makes Alibaba one of Daily Journal's largest investments, alongside Bank of America and Wells Fargo. It also represents a major vote of confidence for the company following Munger's controversial interview on CNBC back in June, during which he praised China's financial regulators and said they did the "right thing" in reining in the planned IPO of Ant Group, an Alibaba affiliate.
Alibaba's depressed valuations
Alibaba stock's steep decline started last December when China's SAMR (State Administration for Market Regulation) launched an antitrust probe into its e-commerce business.
That probe concluded in April, with the SAMR levying a record fine of $2.75 billion against Alibaba and forcing it to end its exclusive deals with merchants. Alibaba was also hit by a series of smaller fines for its promotional pricing strategies and unapproved acquisitions.
As a result, Alibaba's stock trades at just 14 times forward earnings. That depressed valuation, which is much lower than competitor JD's forward P/E ratio of 37, indicates it could quickly rebound if those regulatory headwinds fade.
A broader recovery in Chinese tech stocks
China's ongoing crackdown on its top tech companies, escalating political tensions between China and the United States, delisting threats for U.S-listed Chinese stocks, as well as potential property and energy crises in China have all made it painful to invest in Chinese tech companies.
But after a challenging September, many Chinese stocks stabilized in early October as concerns about the property market slightly receded and analysts expressed optimism about the upcoming virtual summit between American President Joe Biden and Chinese President Xi Jinping. That stabilization could be short-lived, but it could generate short-term gains for Alibaba as investors cautiously revisit the stock.
Why Alibaba isn't a worthy long-term investment yet
Alibaba might look tempting to investors who believe the regulatory tensions will ease, but I'm still staying bearish on the stock for three reasons.
First, China's crackdown on Alibaba and its affiliates is far from over. In early September, Alibaba pledged to invest about $15.5 billion in China's "common prosperity" initiatives over the next five years, presumably to appease the antitrust regulators. But later that month, the Chinese government forced Alibaba to sell its stake in a state-backed media broadcaster at a steep loss, then moved to break up its fintech affiliate, Ant Group (in which it owns a 33% stake in), into three separate companies.
The regulators also forced Ant to open up its Alipay payment platform to Tencent's WeChat Pay and vice versa. The elimination of barriers between those two platforms, which hold a near-duopoly in China's digital payments market, might be good for businesses consumers, but it also prevents Alibaba and Tencent from locking those merchants and shoppers into their ecosystems.
Second, China's actions against Alibaba, especially its bans on exclusive deals with merchants and promotional pricing strategies, could erode Taobao's and Tmall's defenses against JD, Pinduoduo, and other e-commerce competitors.
Lastly, Alibaba is increasingly depending on its lower-margin brick-and-mortar, direct sales, cross-border, and logistics units to mask the slower growth of its core online marketplaces. That shift, along with its big investments in its unprofitable cloud business and obligatory investments in China's "common prosperity" measures, will likely throttle Alibaba's earnings growth as its revenue growth slows down.
Don't confuse short-term buzz with long-term strength
Alibaba is gaining a lot of attention from Reddit's WSB crowd, and that increased interest could generate short-term gains. But over the long term, I believe investors should avoid Alibaba and stick with e-commerce stocks which aren't located in China, even if Munger thinks it's safe to brush off the company's regulatory and fundamental challenges.