Alibaba (BABA +0.75%) has become a frustrating e-commerce stock for long-term investors. Since its September 2014 IPO in the U.S., it has risen by only 14%, giving back most of the 370% gain it had claimed at its peak in the fall of 2020.
However, a vote of confidence from the Chinese government sent Alibaba stock price higher by 37% on March 16. Now, investors must decide whether this stock can finally deliver longer-term growth or if they should stay away.
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Alibaba stock and U.S.-China relations
The China factor has become both a blessing and a curse to Alibaba stock. Since China is an emerging market with more than quadruple the population of the U.S., the potential for this market has enticed investors for decades.
Indeed, this factor came into play on March 16 when the country's top economic advisor Liu He said the country would work to bolster the Chinese stock market and enhance China's economic growth. This announcement sent Alibaba's stock higher in the subsequent trading session.
However, geopolitical tensions have long existed between the U.S. and China, exacerbated during the Trump administration by a heated trade war involving tariffs on numerous goods and services. Also, China's economy has suffered amid a resurgence in COVID-19 and subsequent lockdowns. The Russian-Ukrainian conflict and China's involvement in it is the latest nail in its coffin as it reminded investors of strains in the U.S.-China relationship.
Where Alibaba stands financially
Still, Alibaba is one of the world's largest e-commerce companies, and its financials remain solid. Revenue for the first nine months of fiscal 2022 (ending March 31) came in at 649 billion yuan ($102 billion), a 23% increase year over year. Still, net income fell 54% during that period to just 71 billion yuan ($11 billion) on increases in the cost of revenue, sales and marketing expenses, and an impairment charge to goodwill (basically a write-off on unproductive assets) of 25 billion yuan ($4 billion).
These earnings struggles may linger as analysts project net income for both 2022 and 2023 will lag earnings per share in 2021. But these analysts also expect revenue to grow by 22% this year and 14% in 2023. Also, despite the considerable one-day uptick, Alibaba's stock price is down 55% from its 52-week high.
NYSE: BABA
Key Data Points
That discount may price some of the slowing growth and earnings challenges into the stock. It currently sells at a P/E ratio of 28, and its valuation has long lagged that of its U.S. counterpart, Amazon, which currently sells for 47 times earnings. Moreover, Alibaba's P/E falls to 13 when looking at forward earnings, a level that could interest some new investors in the stock. Still, while the recent news offers a reprieve from the political tensions, it serves as a reminder that those concerns remain with Alibaba.
Should you consider Alibaba?
The vote of confidence and the company's forward valuation may tempt investors despite Alibaba's price spike. However, tensions remain relatively high between the U.S. and China, meaning the political risk for U.S. investors will remain a concern. Additionally, new COVID-19-related restrictions in China will probably hurt profitability as revenue growth continues to slow. While Alibaba stock could rise for a time, too many questions remain to consider a long-term position in the internet and direct-marketing retail stock.
