Alibaba (BABA 2.92%), the largest e-commerce and cloud infrastructure company in China, went public on Sept. 19, 2014 at $68 per share. The stock opened at $92.70, ended the first trading day at $93.89, then rallied over the following six years to an all-time high of $317.14 on Oct. 27, 2020.
But as of this writing, Alibaba's stock has dropped to the low $70s, and it could retest its IPO price. Let's review the bear and bull cases again to see if Alibaba is becoming a value trap or a value stock.
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What the bears will tell you about Alibaba
The bears believe Alibaba is a value trap for three main reasons.
First, the Chinese government clearly plans to stymie its long-term growth. After concluding a nine-month antitrust probe last September, China's State Administration for Market Regulation (SAMR) hit Alibaba with a record $2.9 billion fine. It also forced it to abandon its exclusive deals with top merchants, restricted its collection of customer data, and barred it from using steep promotional discounts to gain new shoppers. In addition, Alibaba was fined for failing to report several previous investments, and it's now required to seek out the government's approval for all of its future business deals.
That tighter oversight has also prevented Alibaba from profiting from the planned IPO of its fintech affiliate Ant Group. Alibaba owns a third of Ant, the parent company of Alipay, but its IPO has been indefinitely postponed amid Beijing's ongoing crackdown on its top tech companies.
Second, Alibaba's growth has been cooling off. Its revenue rose 35% in fiscal 2020 and 41% in fiscal 2021 (which ended last March), but analysts anticipates just 20% growth in fiscal 2022 and 15% growth in fiscal 2023. It blames that slowdown on macroeconomic and competitive headwinds for its retail business -- which have been exacerbated by the antitrust restrictions -- as well as a loss of large internet customers at Alibaba Cloud.
But that's not all. The recent resurgence of COVID-19 cases in China could generate unpredictable headwinds this year, while the Russo-Ukrainian conflict will likely impact Alibaba's cross-border marketplace AliExpress, which had been tremendously popular in both countries.
As Alibaba's growth slows, its operating margin is expected to drop from 12.5% in fiscal 2021 to just 8% in 2022 -- mainly due to the commerce segment's growing dependence on lower-margin businesses (such as brick-and-mortar stores, cross-border platforms, overseas marketplaces, and its logistics network) for fresh revenue growth. That ongoing decline will make it difficult for Alibaba to support the growth of its unprofitable cloud, digital media, and innovative initiatives segments -- which expand its sprawling ecosystem into adjacent markets -- with the commerce segment's profits.
Lastly, the U.S. Securities and Exchange Commission (SEC) plans to delist all U.S.-listed foreign stocks -- especially Chinese ones -- that don't comply with new auditing rules in the near future. The variable interest entity (VIE) structure, which circumvents China's restrictions on foreign investments in sensitive sectors like technology and education, could also be outlawed.
What the bulls will tell you about Alibaba
The bulls will likely acknowledge all those problems, but they'll claim they're transitory and that the company's stock is too cheap to be ignored.
Alibaba's growth might be decelerating, but it still controlled 47.1% of China's e-commerce market last year, according to eMarketer. JD.com (JD 2.61%) ranked a distant second with a 16.9% share, followed by a 13.2% share for Pinduoduo (PDD -0.37%). Meanwhile, GlobalData expects China's e-commerce sector to continue expanding at a compound annual growth rate (CAGR) of 11.6% between 2021 and 2025.
Therefore, Alibaba's near-term growth may be hampered by new regulations and macroeconomic challenges, but its Chinese commerce business -- which served 979 million annual active consumers in its latest quarter -- could still grow at a stable clip over the long term. The growth of its overseas marketplaces, which include Lazada in Southeast Asia and Trendyol in Turkey, could also gradually reduce its dependence on China.
As for the delisting threats, China's Securities Regulatory Commission (CSRC) recently expressed its confidence in reaching an agreement with the SEC to resolve the auditing dispute before any firms are actually delisted. The CSRC also previously said that Chinese companies can continue listing their VIEs overseas as long as they properly registered their plans.
If we look past those headwinds, then we're left with a stock that trades at just 14 times next year's earnings and 1.3 times next year's sales. By comparison, Alibaba was valued at about 14 times its fiscal 2025 sales when it listed its IPO shares at $68 for a valuation of $168 billion in Sept. 2014.
Which argument makes more sense?
I think the market has become too bearish on Alibaba, but I don't expect that pressure to ease as long as it remains a top target for regulators in the U.S. and China. The stock is undeniably cheap relative to its growth potential, but it will likely remain a value trap until it resolves those messy issues.
