What happened
Shares of Chinese e-commerce, payments, and cloud giant Alibaba (BABA 0.28%) fell 5% Friday after a positive session Thursday that followed the delivery of better-than-feared quarterly results.
Tech stocks broadly struggled Friday after the Labor Department released a July jobs report showing that the U.S. labor market is still red hot, sparking renewed fears that the Federal Reserve will enact more aggressive hikes to the benchmark federal funds rate. Higher interest rates could also strengthen the dollar further, especially relative to the Chinese yuan, since China's economy is struggling right now. A stronger dollar would decrease the value of Alibaba's earnings in dollar terms, so it's perhaps no surprise the company's U.S.-listed shares gave back some of Thursday's gains.
Meanwhile, heightened geopolitical tensions between the U.S. and China emerged this week and worsened on Friday, which likely didn't help matters.
So what
For the quarter that ended June 30, Alibaba's revenue was roughly flat versus the prior-year period, with its e-commerce empire's revenue falling only 1% (though that beat analysts' expectations), while its cloud unit grew 10% year over year. Earnings per share declined 29% as the company's cash cow Taobao and Tmall platforms saw mid-single-digit percentage declines in gross merchandise volume, harming profitability by even more.
Still, those results were actually much better than analysts had feared they would be given China's ongoing economic problems, which included intense COVID-19 lockdowns in several key metropolitan areas for much of the quarter.
Of course, these results weren't good overall, so investors may be thinking twice about Thursday's gains. Alibaba, in fact, announced 10,000 layoffs Friday, signaling its growth headwinds could persist for some time.
Additionally, Chinese stocks tend to fare poorly when U.S.-China relations deteriorate, and there continued to be ominous developments Friday after this week's visit by House Speaker Nancy Pelosi to Taiwan. In addition to China firing ballistic missiles over Taiwan into Japanese-controlled waters on Thursday, China announced Friday that it was cutting off dialogue with the U.S. on both military and climate matters.
In the wake of escalating tensions, it's perhaps no wonder U.S. investors sold off U.S.-listed Chinese stocks broadly, and Alibaba specifically.
Now what
Leading Chinese stocks present a quandary for U.S. investors today. On the one hand, China does have a rising middle class and, in theory, higher growth prospects than the U.S. -- although this year's struggles will bring China's growth down to U.S. levels, or worse.
In addition, Alibaba looks quite cheap by conventional metrics. The stock trades at only 11 times forward earnings estimates, and it has a cash balance of $67 billion -- about a quarter of its market cap -- against just $22 billion in debt. This is in addition to the company's 33% stake in Ant Financial, the fintech juggernaut that is still a private company, as well as equity stakes in other companies.
Alibaba could therefore be a screaming bargain if the Chinese economy turns around, if its heavy spending on the cloud and other new initiatives pays off, and if Chinese-U.S. relations improve.
However, that seems like an awful lot to expect these days -- especially when it comes to that last issue.
