When Alibaba (BABA 0.59%) went public at $68 per American depositary share (ADS) on Sept. 19, 2014, the Chinese e-commerce and cloud leader raised $25 billion and eclipsed Facebook -- now known as Meta Platforms -- as the largest U.S. IPO in history. Its stock eventually rallied to an all-time high of $317.14 on Oct. 27, 2020.
But today, Alibaba's stock trades at about $83 a share. The bulls retreated as Alibaba faced three major headwinds: China's antitrust crackdown on its core e-commerce business, China's economic slowdown, and the unresolved delisting threats for U.S.-listed Chinese stocks. So should investors view Alibaba as a contrarian buy or a falling knife right now? Let's review the main reasons to buy, sell, or hold this polarizing Chinese stock.
Image source: Alibaba.
The main reasons to buy or hold Alibaba stock
Alibaba remains the largest e-commerce and cloud company in China by a wide margin. Its Taobao and Tmall marketplaces still account for over half of China's entire e-commerce market, according to the International Trade Commission, while its two closest competitors -- JD.com (JD 6.12%) and Pinduoduo (PDD 2.80%) -- only control 16% and 13% of the market, respectively. Alibaba Cloud commands 39% of China's cloud infrastructure market, according to Canalys, putting it far ahead of Huawei Cloud (19%) and Tencent (TCEHY 2.19%) Cloud (15%).
Yet neither of those markets has fully matured yet. China's e-commerce market could still expand at a compound annual growth rate (CAGR) of 11% from 2023 to 2028, according to Mordor Intelligence, while McKinsey expects China's public cloud services market to expand at a CAGR of nearly 30% from 2021 through 2025.
Alibaba faces near-term regulatory and competitive challenges, but it restructured its business into six new business groups -- Taobao and Tmall, Alibaba International Digital Commerce, Cloud Intelligence, Cainiao Smart Logistics, Local Services, and Digital Media and Entertainment -- earlier this year. That separation could convince the antitrust regulators to back off while freeing each subsidiary to expand on its own, pursue its own funding from external investors, or launch new IPOs. It already plans to spin off its cloud and logistics divisions via IPOs in the near future.
As Alibaba streamlines its sprawling business, its growth is accelerating again as the macro environment improves. Its 14% year-over-year revenue increase in Q1 of fiscal 2024 (which ended on June 30) marked a significant acceleration from its 2% growth in the previous period and was its first quarter of double-digit revenue growth since Q3 of fiscal 2022 (which ended in December 2021). Analysts expect its revenue to rise 11% for the full year -- compared to its 2% uptick in fiscal 2022.
Alibaba's margins are also expanding as its revenue growth stabilizes. As a result, analysts expect its net income to soar 77% in fiscal 2024, which would also be a major acceleration from its 17% rise in fiscal 2023. Those are exceptional growth rates for a stock that trades at just 12 times next year's earnings.
The main reasons to sell Alibaba
The bears will note that Alibaba's Taobao and Tmall business is still growing slower than Pinduoduo, which is expected to increase its revenue by 50% this year. The Taobao and Tmall group was also the only segment to suffer a year-over-year contraction in adjusted earnings before interest, taxes, and amortization (EBITA) margins in Alibaba's latest quarter, which suggests it's still struggling with the regulatory, macro, and competitive challenges.
Most of Alibaba's e-commerce growth was driven by its overseas marketplaces -- including Lazada in Southeast Asia, Trendyol in Turkey, and AliExpress for its cross-border sellers -- instead of Taobao and Tmall. That's troubling because Alibaba's International Digital Commerce group is still unprofitable, while the Taobao and Tmall Group remain Alibaba's highest-margin segment.
The recent departure of CEO Daniel Zhang, who had led Alibaba since 2015 -- and his surprising refusal to stay on board to lead the Cloud Intelligence division through its upcoming IPO -- raises additional red flags regarding the company's future.
Finally, there's no guarantee that Alibaba's big split into six separate business units will resolve its regulatory and competitive issues. Those six divisions will still be subsidiaries of Alibaba, and it will remain the biggest target for antitrust regulators in the e-commerce and cloud markets for the foreseeable future. Therefore, it might make more sense to invest in Pinduoduo or JD.com -- both of which face fewer regulatory headwinds -- than Alibaba. Investors can also profit from the growth of China's cloud market through Tencent or Baidu.
Is it the right stock to buy, sell, or hold?
Alibaba still has a lot to prove, but it makes more sense to buy or hold the stock than to sell it. Its growth should stabilize as China's e-commerce and cloud markets expand, and its stock seems too cheap to ignore.
