Alibaba (BABA 2.12%) stock has been on quite a roller-coaster ride over its history. The high-profile Chinese e-commerce company's share price surged for several years following its 2014 initial public offering, but crashed through 2021 and 2022. The combination of a crackdown by the Chinese government on its tech sector and a series of intense pandemic lockdowns across that nation slowed its growth and spooked investors.
With Alibaba stock now down more than 70% from its peak, some investors are seeing value in it -- but is it a buy? We asked a bull and a bear to debate the question. Here's what they had to say.
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Alibaba is delivering impressive growth
Parkev Tatevosian: Alibaba is sometimes called the Amazon of China because of their similar business models.
Although Alibaba generates revenue from several large markets worldwide, China is its primary source of revenue and profits. That was a headwind for the company over the last several years as China imposed some of the world's strictest lockdowns in support of its "zero COVID" policy. However, that could become a significant tailwind as the Chinese economy's reopening has gained momentum over the last few months.
Longer term, Alibaba has done an excellent job expanding sales and profits. Indeed, over the last decade, its revenue has grown at a compound annual rate of 45.5%. To put that figure into perspective, Amazon's compound annual growth rate over the same time was 23.7%. More impressively, Alibaba's operating profit margin averaged 28.9% during that time. Compare that to Amazon's operating margin, which averaged 2.7%.
These business metrics include the challenging times during COVID lockdowns. As restrictions on mobility in China are easing, Alibaba will likely capture a lift from its most lucrative market.
BABA PE Ratio (Forward) data by YCharts.
Of course, investing in Chinese stocks always comes with an extra serving of geopolitical risk. Still, with the stock trading at a forward price-to-earnings ratio of 11.5, Alibaba offers investors an excellent business at a reasonable valuation.
Still looks like a value trap
Jeremy Bowman: Like a lot of value traps, Alibaba looks great on paper, but the devil is in the details.
The company enjoys a number of competitive advantages, including its leading e-commerce marketplace business in China, which includes both Tmall, for higher-end brands, and Taobao, which is more like eBay. It also has a strong cloud infrastructure business and a number of other subsidiaries involved in things like logistics and digital media, both inside and outside China.
However, in late 2020, after Alibaba founder Jack Ma made critical comments about Chinese finance officials, Chinese regulators began a crackdown on the business, and the stock got hammered. It hasn't recovered since.
Beijing slapped a $2.8 billion antitrust fine on the tech giant in April 2021 and, under pressure from the central government, Alibaba has divested some of its investments in other companies, including media businesses, as Beijing says it wants to encourage competition and limit the dominance of big tech players.
Those moves and Ma's stained reputation (he's been laying low for some time) have made the stock too risky for a large number of investors, and it seems likely to face pressure for as long as President Xi Jinping is in power.
Additionally, the company's latest numbers don't inspire much confidence. Alibaba's revenue grew just 2% in its December quarter. Management blamed that tepid growth rate on softer demand and persistent supply chain disruptions from earlier pandemic restrictions.
There is some good news for Alibaba as China has been lifting its COVID-19 restrictions, but that already seems to be encouraging increased competition. JD.com, China's biggest online retailer, is spending $1.5 billion to lower prices in an effort to gain market share.
That move hit other Chinese e-commerce stocks, including Alibaba, and the upshot is that it won't be so easy for companies in that sector to return to strong profit growth.
Alibaba's share price may look cheap, but the stock still faces a wide range of threats, and the market has understandably lost some confidence in Chinese stocks. As a result, investors can find better and safer investments elsewhere.
