Alibaba (BABA 1.86%) has intrigued U.S. investors ever since introducing its shares in 2014. It went from a business started in Jack Ma's apartment to becoming the largest e-commerce company in China. And like its U.S. counterpart Amazon, it succeeded in the cloud, helping it to make it a major artificial intelligence (AI) play.
Despite its market position, slow growth and an uncertain business environment could give investors pause regarding this internet and direct marketing retail stock. Hence, potential investors need to consider Alibaba's attributes and challenges before deciding whether to buy this stock.
What draws investors to Alibaba stock
In many ways, Alibaba offers a compelling value proposition. For one, it can leverage AI applications due to its position as the world's fourth-largest cloud company. Through AI, it offers data intelligence solutions that could help customers from multiple industries.
Image source: Synergy Research Group.
One benefit is Alibaba's upcoming separation into six companies, with commerce, cloud computing, digital entertainment, and other segments becoming distinct businesses. If the breakup of the former AT&T in the early 1980s and other splits are any indications, the sums of the parts could become worth more than the whole as a result.
Furthermore, Alibaba stock trades at a price-to-earnings (P/E) ratio of 22. This makes it considerably cheaper than MercadoLibre or Amazon, e-commerce peers whose earnings multiples are near or at triple-digit levels.
Alibaba's challenges
Nonetheless, by other measures, Alibaba stock is cheap for a reason. It has always traded at a discount since Alibaba stock is not stock in Alibaba, but rather in an American Depositary Receipt (ADR) or holding company that holds a claim on Alibaba's profits.
Alibaba is not unique in this regard, and most ADR arrangements do not significantly endanger investors. Still, in 2022, Alibaba and other Chinese stocks faced delisting threats from the SEC before the Public Company Accounting Oversight Board received access to the audit information regarding its financial statements. Even though regulators resolved this specific issue, this dispute and existing U.S.-China tensions highlight the ongoing political risk involved with owning Alibaba.
Revenue growth has also come to a standstill. In fiscal 2023 (ended March 31), revenue of more than $126 billion rose only 2% versus fiscal 2022 levels. Economic struggles and the recent COVID-19-related lockdowns likely contributed to the slow growth. In comparison, Alibaba reported 19% revenue growth in fiscal 2022.
Moreover, Alibaba's AI capabilities and other attributes have not translated into stock gains. Although AI has boosted Amazon and numerous other tech companies, investors seem to have ignored Alibaba.
Since the beginning of the year, Alibaba stock is up 2%, versus nearly 15% for the S&P 500. Additionally, its most prominent non-China peers in e-commerce have all outperformed Alibaba and the S&P 500 this year, a factor that bodes poorly for the Chinese conglomerate.
Alibaba stock -- buy, sell, or hold?
Given the state of Alibaba, investors probably should sell the stock. Rather than focusing on low revenue growth, U.S.-China tensions, or performance compared with its peers, investors should look at its performance versus the S&P 500.
The S&P 500 is one of the lowest-risk ways to invest in the stock market. In contrast, Alibaba faces so many risks that a low P/E ratio and AI-based potential are not drawing investors into the stock. Hence, instead of owning Alibaba, investors should consider switching it out for either a non-Chinese peer or an S&P 500 index fund.
