Few stocks have as many competitive advantages as Alibaba (BABA 0.59%) yet have been as disappointing on the stock market.
Shares of the Chinese tech giant have fallen 68% over the past three years and have shown few signs of recovery despite hopes that the Chinese economy would rebound from the pandemic, that a breakup plan would unlock value, and that the business would recover after the Beijing's crackdown on the tech sector.
Those theses haven't played out yet, but that doesn't mean Alibaba is hopeless. Let's take a look at the reasons to buy, sell, and hold the Chinese e-commerce stock today.
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Buy Alibaba stock
There are several reasons Alibaba stock looks like a buy. First, the company's revenue growth is finally starting to accelerate.
Revenue rose 9% in its most recent quarter, and the company reported expanding margins as operating income jumped 34%. The revenue growth shows that Alibaba is still growing in a weak Chinese economy, and Pinduoduo-parent PDD Holdings has gobbled up market share in China's e-commerce sector.
The stock is also cheap based on historical comparisons, and Alibaba is still generating substantial profits. The stock trades at a price-to-earnings ratio of less than 10, giving the stock ample upside if it can demonstrate consistent growth. There's also room for the stock to grow if investors reassess China and the discount applied to most Chinese stocks shrinks.
Alibaba also pleased investors with plans to spin off some of its secondary businesses outside its core e-commerce operation. While that plan took a step back when the company said it wouldn't spin off its cloud division because of U.S. chip export restrictions, it still aims to spin off businesses like its logistics segment and digital entertainment, which could unlock value for investors.
Sell Alibaba stock
The biggest risk facing Alibaba stock continues to be the uncertainty around the Chinese economy and the regulatory environment, as the previous crackdown put significant pressure on Alibaba, which included a multibillion-dollar anti-monopoly fine and several divestitures in an attempt to curry favor with Beijing, which believed that Chinese tech giants had become too powerful.
Economic data out of China remains weak. The December Purchasing Managers Index indicated a slight decline in factory activity, showing that a recovery remains elusive.
The World Bank also expects China's GDP to slow in 2024, and the country faces a number of challenges including falling property values, rising youth unemployment, geopolitical tensions with the U.S. over semiconductor technology, and a weak manufacturing sector.
Given Alibaba's weak growth in its recent quarters, a recovery in the business is likely predicated on a strengthening Chinese economy.
Hold Alibaba stock
The biggest reason to hold Alibaba is that the business is still in flux. The company's spinoff plan took a step back with the new U.S. chip export regulations, but raising capital could certainly give the stock a boost, and it would also probably please Chinese regulators.
Alibaba also has a new CEO. Eddie Wu replaced Daniel Zhang in September, and Wu also took over the top job at Alibaba's core e-commerce business, made up of Taobao and Tmall.
Wu also aims to sharpen the company's focus on artificial intelligence and wants to bring in a younger management team. He also said he wants to prioritize putting the user first.
Alibaba will also need to defend itself against rising competition from Pinduoduo, and Douyin, China's TikTok, which has built a significant shopping business. Those fast-growing companies have taken market share from Alibaba in recent years.
While Alibaba has the potential to reinvent itself, investors may want to hold the stock until there are clearer signs of a turnaround.
