For the last year or so, Alibaba (BABA -4.01%) has been the poster child for the meltdown in China stocks.
As Chinese tech names have plunged, no one has gotten more attention than Alibaba, which has been singled out by Beijing on multiple occasions.
Investors first caught a whiff of what was to come in November 2020 when Ant Group, the financial arm of Alibaba, had its IPO blocked by financial regulators. That move was seemingly in retaliation for disrespectful comments that Jack Ma made to financial regulators at a public forum, and Ma retreated from public life in the aftermath, sparking rumors about his whereabouts. The stock continued to spiral after regulators announced an anti-monopoly probe and eventually fined it $2.8 billion, and the government followed that up by ordering it to divest from several of its media businesses and restricting its vendor relationships.
Alibaba shares peaked at $319.32 on Oct. 27, 2020, before the Jack Ma kerfuffle and fell 77% from there to $73.28 on March 15. However, investor sentiment suddenly changed Wednesday when Beijing announced support for financial markets and the economy, seemingly recognizing that the more-than-$2 trillion in stock market value that had been wiped away over the last year and the meltdown of the property sector meant it had gone too far in its pursuit of "common prosperity." Vice Premier Liu He, who heads up China's top financial policy committee, said the government should "actively introduce policies that benefit markets."
Additionally, according to Financial Times, Beijing is preparing to allow Chinese companies listed in the U.S. to provide audit information that has long been requested by U.S. regulators. That development will help quell fears over delistings that have contributed to the sell-off in China stocks over the last year.
Together, those two news items set a fire under the Chinese tech sector. Alibaba jumped 37%; Tencent rose 33%, and JD.com soared 39%. Hong Kong's Hang Seng Index jumped 9%, its best single-day performance since 2008.
The sudden turnaround says a lot about Alibaba and the broader China sector.
Image source: Alibaba.
The fear factor
Much of the sell-off over the last 17 months wasn't related to fundamentals. It was fear of the regulatory crackdown, delisting of Chinese stocks, and a worsening relationship between the U.S. and China. The massive gains in Alibaba and its peers Wednesday show that that fear can easily be reversed, and the Chinese government can just as easily become a tailwind rather than a headwind for these stocks. Among the comments regulators made were that its crackdown on tech companies should soon be over, which should help restore confidence in Chinese tech stocks.
While it will take more than words from the government for China's economy to recover from the recent slowdown, especially as China is still dealing with pandemic restrictions, the biggest impediment to Alibaba's comeback seems to have been removed.
Image source: Alibaba.
What the fundamentals say
Indeed, Alibaba's most recent earnings report showed signs that the crackdown was having an impact. The company's revenue growth slowed to just 10% in the December quarter, with 7% growth in its core China commerce segment, which the company blamed on slowing market conditions and competition. Though 10% revenue growth is unusually slow for the company, other Chinese e-commerce companies also reported slower-than-normal growth. Still, Alibaba continued to grow its user base in the quarter, adding 42 million consumers, 26 million of which were in China, for a total of 1.28 billion.
The company's adjusted net income declined 25% as it stepped up investments in e-commerce properties like Taobao and Lazada, but it still remains highly profitable with a profit margin of 18% in the quarter. Considering the headwinds from regulations and slowing economic growth, the quarter wasn't bad, and its e-commerce profit machine isn't going away. In fact, the growing user base shows that it's getting stronger.
Image source: Getty Images.
A risk worth taking
Even after Wednesday's surge, Alibaba trades at a price-to-earnings ratio of just 12. While the Chinese government remains a risk and the stock will never earn the valuation it would as an equivalent American company, it appears that the worst is over based on regulators' recent comments. The collapse in China stocks over the last year and the sanctions on Russia are a reminder of the risk involved in international markets, especially ones with authoritarian governments. Investing in Chinese stocks like Alibaba is only suitable for risk-tolerant investors, but if regulators keep their promise to wrap up the crackdown and support markets, and Alibaba returns to its historical growth rate, the path to a double for the stock is clear.
There are still plenty of risks facing the stock, but based on the price and the changing market sentiment, the stock looks more investable now than it has in a long time.
