Chinese internet conglomerate Alibaba Group (BABA 0.09%) has become one of Wall Street's most controversial stocks. A combination of politics and regulatory scrutiny kept Alibaba planted in news headlines over the past few years.
This time, Alibaba is making news by announcing plans to break itself up into as many as six individual businesses, effectively blowing the conglomerate to pieces. Investors are left wondering whether that's good or bad news.
Fortunately, this break-up could be the positive catalyst investors have longed for. Here is why Alibaba could finally be a stock to buy.
Political pressure has depressed the stock
Shares of Alibaba peaked at over $300 per share in late 2020, but it's been a steady decline since then. Alibaba has been caught amid political tensions between the United States and China. At one point the company had failed to adhere to U.S. auditing rules, which put it in danger of potential delisting from the New York Stock Exchange, but that crisis was averted.
Alibaba also faced blowback in its home country. China fined the company $2.8 billion in late 2021 for anti-competitive practices and blocked the IPO of fintech Ant Group, in which Alibaba owns a stake.
The scrutiny from China raises the possibility that it doesn't want a tech company like Alibaba to have too much sway over Chinese consumers. The risk of potential interference from the Chinese government was a massive headwind for the stock in U.S. markets.
Breaking up has significant benefits
Alibaba splitting into different businesses has two significant benefits. First, it potentially gets Chinese regulators off Alibaba's back. The company's known for its e-commerce business, but has several services, including cloud computing, media, logistics, and more. One giant company is more powerful than a half-dozen smaller ones. Breaking it up could remove any perceived threat to the Chinese government.
Second, the split could unlock value for shareholders. A conglomerate, a company with a handful of businesses or brands under its umbrella, sometimes trades at a conglomerate discount. As one company, a conglomerate must share its resources and manage its various parts effectively -- and it's not always easy.
But as individual companies, each business has its resources and needs to only think about itself. Not only could this make each business perform better, but the market could value these individual new companies at higher valuations than the price Alibaba trades. In other words, the sum of the parts is greater than the whole.
The stock's cheap enough to capitalize on changes
A steady dose of negativity slowly pushed Alibaba's valuation lower. Today, the stock trades near its lowest-ever price-to-sales ratio (P/S), and a whopping 70% below its average price-to-earnings ratio (P/E) as a public company (39).
BABA PS Ratio data by YCharts
The political risks may never go away completely, and Alibaba's growth has slowed, so a lower valuation seems justified. Of course, markets can overreact, and that's even easier in a volatile market -- as you've seen.
Investors would likely get pieces of the individual companies as they break off from Alibaba and owning the stock now could get investors shares at a favorable valuation. Only time will tell, but it seems that Alibaba's finally becoming an intriguing stock idea after many months of turmoil.
