Chinese e-commerce company Alibaba Group (BABA 0.87%) has dabbled in controversy over the past year. China's willingness to intervene in how its technology companies operate has driven investors away from the stock, bringing its price down more than 50% from its highs.
If you go by the numbers, it seems apparent that the stock is cheap. However, there are some bargains that investors should avoid. Things could very well smooth out over the long term; however, there are reasons to be cautious toward the stock. Here's what investors need to know.
Image source: Getty Images.
I acknowledge that the stock is a bargain
I'm not here to tell you that the stock isn't on sale because it most definitely is. Shares are trading at a low-single-digit price-to-sales ratio, less than several e-commerce peers like Amazon, Sea Limited, and MercadoLibre. Its price-to-earnings ratio has also slid to its lowest level since 2016.
BABA PS Ratio data by YCharts
Meanwhile, the narrative sounds great on the surface. Alibaba is the leading e-commerce company in China, the world's most populated country, and the second-largest economy. It just announced earnings for the quarter ending Dec. 31, growing revenue 10% year over year to $38 billion.
However, cracks under the surface, both within Alibaba and external forces, could continue to weigh on the stock moving forward. It's these variables that are driving the valuation lower.
Influence from the Chinese state
Over most of the past year, Alibaba's main problem has been the Chinese government's increasing influence on the company. China has seemingly made it a point to rein in big-tech companies' power in the country.
It blocked an IPO for Ant Group, which operates the country's largest digital payments platform, Alipay, and is a business that Alibaba owns a 33% stake in. The IPO could have seen a public market valuation as high as $310 billion. Chinese regulators suspended the IPO and forced Ant Group to restructure, splitting its payment platform from its lending business and subjecting it to stricter oversight. The suspended IPO destroyed billions of dollars in value from what could have been Alibaba's $100 billion stake.
Alibaba has also directly butted heads with the Chinese state, incurring a $2.8 billion fine for antitrust violations, and has committed $15.5 billion to China's agenda to close wealth gaps in the country.
Potential tensions with the U.S.
The conflict between Russia and Ukraine has escalated tensions worldwide, and there also have been rumors about China getting increasingly aggressive toward Taiwan. Taiwan is the world's largest exporter of semiconductors, so the United States could support Taiwan if a conflict occurs.
Retaliation could come in the form of sanctions or delisting of Chinese stocks from U.S. exchanges. Admittedly, this is a lot of speculation, but with global tensions high right now, it's probably fair to consider all possibilities. The U.S. recently announced an investigation into Alibaba Cloud for potential national security risks, which seems to underline the troubling situation.
China's economy is slowing
Additionally, China's economy has slowed over the past year due to the COVID-19 pandemic and a struggling real estate industry, as seen in the chart. China's slowing economic growth could negatively impact consumer spending, and Alibaba's recent earnings report suggests it may already be happening.
China Real GDP YoY data by YCharts
Alibaba grew its commerce revenue 7% year over year to $27 billion in the quarter ending Dec. 31, 2021. It's a dramatic slowdown from the 38% year-over-year growth Alibaba's commerce segment posted in the quarter ending Dec. 31, 2020. Investors will need to see how this progresses over the next several quarters, but slowing growth won't help Alibaba's stock fetch a higher valuation.
Now is not the time to take a chance on Alibaba
There's a lot of negative news right now, both in the headlines and in Alibaba's business itself. Sometimes there are great buying opportunities in these situations, where buying a broken stock can pay off when the company gets right again.
However, there's an additional risk from various outside forces that are unpredictable at best right now. Investors have to weigh the risk versus the potential reward and decide if rolling the dice is appropriate. It seems like right now, Alibaba is giving investors tough odds to read, which might make a cautious approach the wisest strategy until the circumstances around Alibaba clear up.
