Will Alibaba Continue to Rally Now That its Anti-Trust Investigation is Over?
Alibaba (BABA) stock is one of the most intriguing tickers in the entire stock market. In the growth space, this is probably the ultimate battleground stock. Bulls will tell you that the company is growing like a weed (which it is; during BABA’s last quarter, its revenue grew by 37% year-over-year and its adjusted EBITDA posted 22% growth). BABA is the eCommerce leader (amongst other things; like its American counterpart, Amazon (AMZN), BABA’s business has expanded away from its eCommerce base into other things like cloud computing, digital payments, logistics, and digital marketing) is Asia, which has a population that can support this immense growth over the long-haul. Unlike Amazon, Alibaba is an asset-light business, which is even more appealing to growth investors who focus primarily on software-as-a-service (SaaS). Alibaba doesn’t own merchandise or warehouses; instead, the company focuses on software solutions that connect buyers and sellers and help goods be delivered in an expedient manner.
The company has exceeded in growing its regional, and even global influence, and therefore, has minted itself one of the premiere technology companies on planet Earth. However, bears will say that none of this growth matters, because frankly, it cannot be trusted. Chinese companies have a long history of shady accounting practices, which have scared off many western investors. What’s more, the threat of regulation from the Chinese Communist Party is a constant threat to growth.
4-star Nobias analyst, Jeremy Bowman of The Motley Fool, recently touched upon his saying, Chinese stocks tend to trade at a discount to their American peers due in part to investor cautiousness about the influence of the Chinese Communist Party.” However, he did go on to note that “the effect of China's anti-monopoly law in this instance isn't much different from that of similar laws in the U.S. and Europe,” pointing towards a potential overreaction.
Lastly, geopolitical disputes between the U.S. and China have recently created another potential headwind for BABA shares: delisting from U.S. stock exchanges. At this point, it’s speculative as to whether or not this threat will come to fruition and if so, which companies would be removed; however, the risk remains a dark shadow above the head of a stock like Alibaba, scaring conservative investors away. But, not all conservative investors. Arguably the king of all conservative, value investors, Charlie Munger, probably best known as Warren Buffett’s right hand man at Berkshire Hathaway, recently initiated a large BABA stake in the Daily Journal’s portfolio, which Munger manages. Alibaba is now the Daily Journal’s third largest holding and this purchase has certainly made waves throughout the value investing community in recent weeks.
Over the last 6 months, BABA shares are down 22.33%. However, during this period, the company’s growth has remained strong. The combination of rising bottom-line results and a falling shares price has resulted in a low price-to-earnings ratio, especially on a forward looking basis. Right now, BABA shares trade for approximately 21.5x their current forward looking consensus estimate for earnings-per-share, which sits at $11.05. This price-to-earnings multiple in the low 20’s means that BABA shares are much cheaper than the popular eCommerce plays. For instance, Amazon shares trade with a forward P/E ratio of 71.1x.
The uncertainty surrounding BABA shares has created an attractive opportunity in the eyes of many investors. We recently tracked reports regarding BABA shares amongst the 4 and 5 star analysts that Nobias follows and saw an average price target of $321.57 (this average was derived from 7 reports posted since the start of 2021). Today, Alibaba shares trade for $238.69, which implies near-term upside of nearly 35%, relative to the 4 and 5 star consensus target.
And, in recent days, the bullish sentiment surrounding BABA has been rising due to what appears to be the conclusion of the anti-monopoly investigation by Chinese regulators that was plaguing the stock. Chinese investigators were looking into Alibaba’s practices of not allowing merchants to sell on other platforms. This investigation came on the heels of the 2020 bombshell news regarding Chinese regulators disallowing the Ant Financial spin-off, which resulted in Alibaba’s famed CEO, Jack Ma, to go into hiding.
The onslaught of regulatory pressure on BABA has been immense; however, when news broke that Alibaba was fined $2.8 billion by the regulators, many viewed this fine as a slap on the wrist. 5-star Nobias analyst, Joe Tenebruso, put this fine into perspective recently, saying, “The penalty payment equates to 4% of Alibaba Group's domestic revenue in 2019. Chinese law allows for a maximum penalty of 10% of revenue. Moreover, there were no requirements for divestitures or major structural changes to Alibaba's business.” While discussing the Alibaba fine in his recent article, Bowman said: “While investors have been fearful of the regulatory grip of the Chinese government, the fine is also notably less than the penalties that Facebook and Alphabet have paid. In 2019, Facebook was fined $5 billion by the Federal Trade Commission over violating consumers' privacy rights, and the stock barely flinched. Alphabet's Google, meanwhile, was forced to pay $9.7 billion in three antitrust cases in the EU.” Bowman continued, noting BABA’s apparent contrition, highlighting a statement that the company offered regarding the fine in which it said, "We are committed to ensuring an operating environment for our merchants and partners that is more open, more equitable, more efficient and more inclusive in sharing the fruits of growth."
As Margaret Moran, a 4-star Nobias analyst who writes for GuruFocus said in her recent article, “Investors cheered the news on Monday, bidding the stock up more than 9% to around $244.01 throughout the day's trading as many were no longer deterred by the uncertainty of pending regulatory concerns.” Moran quoted Alibaba’s Chief Executive, Daniel Zhang, who in response to the regulators’ decision said, “We will incur additional cost. We don't view this as a one-off cost. We view this as a necessary investment to enable our merchants to have a better operation on our platform."
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
These “additional costs” have caused analysts to lower their near-term outlooks for BABA’s bottom-line growth. However, right now the consensus estimate for this year’s earnings-per-share growth remains in the double digits, showing that the regulatory decision is not thought to be crippling, by any means. Moran also noted that Alibaba’s Executive Vice Chairman, Joe Tsai, summed up investor sentiment, saying, "We are pleased that we are able to put this matter behind us." Moran offered a bullish conclusion to her piece, saying, “All things considered – clearing the regulatory hurdle, investing in merchant services, the strength of the company's network effect and the recovery of the Chinese economy, among other factors – Alibaba could be set for a strong run in 2021.”
To conclude his recent Alibaba piece, Tenebruso quoted J.P. Morgan analyst, Alex Yao, who is in agreement with Moran’s sentiment. Yao recently reiterated his overweight stance on BABA shares, noting a $320 price target, which represents roughly or roughly 33% upside, saying, "The event will serve as a closure of investors' concern on Alibaba's core commerce regulatory risks.”
This appears to be the overarching sentiment when it comes to Alibaba shares. The combination of high growth, attractive value, and a reduced regulatory burden, points towards a bullish future. Yet, the threat of heavy handed regulation here remains a threat and only time will tell if this Chinese equity will be able to overcome investor fears related to government oversight over the long-term.
Disclosure: Nicholas Ward is long AMZN but has no position in BABA. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.