Alibaba (BABA 2.92%) has taken investors on a wild ride since its IPO in 2014. China's top e-commerce and cloud platform company initially dazzled investors with its robust growth rates, and its stock hit an all-time high of $317.14 in October 2020. But over the following two years, Alibaba's stock was crushed by an antitrust probe and fine, new restrictions on its e-commerce business, COVID-19-related lockdowns, and other macro headwinds in China. It also faced the threat that its stock would be delisted from U.S. exchanges.
Today, Alibaba's stock trades at about $87, which is still above its IPO price of $68 per share but well below the range where it traded in its heyday. It also looks historically cheap at 9 times forward earnings, but investors still seem reluctant to buy the stock.
Image source: Alibaba.
Last month, I said Alibaba might be a worthwhile investment if it faced fewer regulatory headwinds, the Chinese government relaxed its draconian zero-COVID policies, and the Chinese economy stabilized. So are the scales gradually tilting in favor of the bulls or the bears? Let's review three new reasons to buy Alibaba -- as well as three reasons to sell it.
The three new reasons to buy Alibaba stock
The bulls might be interested in buying Alibaba's stock again for three reasons. First, the three-hour meeting between U.S. President Joe Biden and Chinese President Xi Jinping at the G-20 summit in Bali on Nov. 14 was widely seen as a positive step toward reducing the economic and political tensions between the two nations, which had intensified significantly after Speaker of the House Nancy Pelosi visited Taiwan in early August.
A de-escalation of those tensions might help bring some value-seeking investors back to Chinese stocks again, and Alibaba -- the bellwether of China's retail and tech sectors -- could regain some of its former popularity.
Second, in mid-December, China started to loosen its zero-COVID rules following waves of anti-lockdown protests across the country. This policy shift might breathe fresh energy into China's economy, which has been growing at its slowest rate in decades, and drive more shoppers to Alibaba's online marketplaces and brick-and-mortar stores. A broad recovery in the Chinese enterprise sector would also boost Alibaba's cloud platform revenues.
Lastly, the Chinese government recently began allowing U.S. regulators to review Chinese audits of companies based in Hong Kong and mainland China. Under a law enacted in the waning days of the Trump administration, U.S. regulators have been threatening to delist any Chinese companies that refuse to open their books to overseas auditors for three consecutive years. Previously, Beijing had refused to allow the required audit data to be shared with non-Chinese firms based on its own regulations, so this concession might enable top Chinese stocks like Alibaba and Baidu to remain on U.S. exchanges.
The three new reasons to sell Alibaba
Those positive developments make Alibaba's stock look a bit more attractive, but the company is certainly not out of the woods yet. Three other recent developments suggest it's still too early to bet on its long-term turnaround.
First, Chinese regulators reportedly plan to levy a $1 billion-plus fine on Alibaba's fintech affiliate, Ant Group, which controls the digital payments platform Alipay, and impose fresh restrictions on the company. Chinese regulators scuttled Ant's planned IPO in November 2020.
Tighter restrictions for Alipay, which shares a near-duopoly in China's digital payments market with Tencent's WeChat Pay, could hobble Alibaba's ability to expand its ecosystem beyond its first-party online marketplaces and brick-and-mortar stores. It could also make it easier for smaller digital payment platforms to challenge that duopoly.
Second, the Biden administration's recent ban on all sales of advanced semiconductor chips to China will hurt Alibaba. Alibaba was recently banned from licensing the Neoverse V-series chip designs from SoftBank's Arm Holdings amid concerns that the new chips were too powerful. That ban could make it tougher for Alibaba to upgrade its own servers to handle advanced machine learning and AI tasks, which would be detrimental to both its e-commerce and cloud platform businesses.
Lastly, Alibaba's co-founder Joseph Tsai is reportedly in talks to sell 8% of his stake in the company, which would be worth about $260 million. Tsai is the company's third-largest stakeholder after SoftBank and co-founder Jack Ma, and it seems odd that he would sell so many shares with the stock down by nearly 70% over the past two years.
Is it the right time to buy Alibaba again?
Analysts currently expect Alibaba's revenue and earnings to grow by 6% and 3%, respectively, this year. Those estimates would represent the company's slowest growth rates since its IPO, but it will also likely remain the dominant e-commerce and cloud company in China for the foreseeable future.
Alibaba's outlook could improve as China loosens its COVID restrictions, and the stock could benefit once the delisting threat from the U.S. is addressed. But it still faces cutthroat competition in China's e-commerce market. Furthermore, its growth still might be hampered by tough regulatory restrictions. As the bear market in tech drags on, investors should stick with more promising growth stocks instead of Alibaba.
