Alibaba with Nobias technology: Is The Regulatory Risk Worth The Reward?
In mid-April, we published an article, highlighting Alibaba (BABA). At the time, BABA shares were trading for approximately $238/share. Back then, Alibaba shares had fallen more than 25% since their 52-week highs and we highlighted the bull/bear arguments that credible authors were making for and against the stock, in the face of ongoing Chinese regulatory fears. Today, we see BABA shares trading for $191.66, which means that they’ve fallen another 19.4% and now trade with a 40% discount relative to their current 52-week high of $319.32.
The regulatory fears still represent the overwhelming headwinds for this stock. However, from a fundamental standpoint, Alibaba’s growth story remains intact. This is what makes BABA so intriguing. Relative to its big-tech counterparts in the United States, BABA shares look relatively cheap on a trailing and forward looking basis. However, investors continue to fear potential backlash that the company might face from the Chinese Communist Party as well as the threat of de-listing and/or the destruction of the variable interest entity (VIE) structure which allows for international investors to gain exposure to various Chinese equities.
Therefore, in this piece, we wanted to take another look at BABA shares to see what the 4 and 5-star analysts that we track at Nobias have recently said about the company in an attempt to see whether or not these are shares that investors should consider buying into weakness.
Billy Duberstein, a Nobias 5-star rated analyst, recently published an article on The Motley Fool titled, “Why Alibaba Stock Fell 13.9% in July”. In his piece, Duberstein began by highlighting the Ant Financial IPO which was canceled by Chinese regulators last year as well as the $2.8 billion fine that the Chinese government forced Alibaba to pay because of anticompetitive practices. However, he continued, highlighting the more recent weakness saying, “Last month, however, marked a whole new ball game for Chinese technology stocks broadly, especially those listed on U.S. exchanges. Thus, Alibaba's stock got cut down further with the rest of the sector.”
Regarding the more broad issues that big-tech names in China have been having with regulators, Duberstein wrote, “In the early part of the month, regulators banned DiDi Chuxing from app stores, citing violations of data collection and usage policies. However, many interpreted the move as retaliation against Didi for going through with its U.S. IPO, even after authorities apparently didn't want the company to do so.” Then, he continued, saying, “Regulators then decimated the online education sector, saying online education companies would be prevented from making a profit on after-school tutoring services.”
Duberstein also mentioned a crackdown on the food delivery industry in China with regard to maintaining minimum wages and mentioned that while Alibaba is not the industry leader in that space, the company “also competes in delivery through its Ele.me and Freshippo platforms.” All in all, he notes, BABA was not directly in the cross hairs of any of the recent Chinese government regulations. However, he notes, “Since Alibaba is a large component of many Chinese technology ETFs and index funds, it was hit along with the rest, despite most of July's crackdowns being directed at other companies.”
Duberstein summed up his piece, highlighting the company’s valuation, strong balance sheet, and continued leadership position in a handful of attractive industries with perceived secular tailwinds. However, he clearly stated that ongoing regulation is a “wildcard” for the company and therefore, this may not be the right stock for risk averse investors. He writes, “At a valuation of just around 20 times next year's earnings estimates, Alibaba's stock seems quite cheap, especially since it also has a healthy net cash position of around $50 billion and equity interests in many other companies. However, the Communist Party's crackdown on tech companies remains a big wild card. Still, for those willing to bet the regulatory onslaught will end at some point, Alibaba's leading positions in e-commerce and cloud computing could present an attractive long-term opportunity.”
Since our last article, BABA posted its second quarter earnings results. The outcome was mixed, with the company beating analyst consensus estimates on the bottom-line, but missing top-list expectations. Zheping Huang, a Nobias 4-star rated analyst, covered the company’s earnings report in an article on Yahoo Finance. Regarding the company’s fundamental performance, Huang said, “Revenue for the three months ended June climbed to 205.7 billion yuan ($31.8 billion), compared with the 209.4 billion yuan average of analyst estimates. Net income was 45.1 billion yuan, rebounding from a loss in the previous quarter following the record antitrust penalty. The company announced Tuesday it was boosting its share buyback program by 50% to $15 billion.”
Nobias 5-star rated analyst, Sam Quirke touched upon the strong quarterly results and the even more appealing valuation that the company appears to offer in his recent article saying, “The current downtrend has also pulled down Alibaba’s price-to-earnings ratio which is now at an appetizing 23. This is well below the mid-50s where it spent much of 2017, 2018, and 2019 and further boosts the risk/reward set up currently in play.”
Quirke continued, saying, “Any relaxation in government scrutiny or geopolitical tension would also go a long way to easing the downward pressure, but rest assured; this is a fast-growing e-commerce company that’s on track to service more than a billion unique customers annually in the coming years. It’s already trading at a significant discount and any further weakness should be viewed as a buying opportunity.” He wrote this piece on August 4th and the stock closed that trading session at $200.71. And, as Shanthi Rexaline, a Nobias 4-star rated analyst, pointed out in her recent piece, Duberstein and Quirke aren’t the only individuals who believe that BABA looks cheap after its recent sell-off.
On August 4th, Rexaline penned an article highlighting 3 analyst upgrades which came after Alibaba reported Q2 numbers. In her piece she wrote: “Needham analyst Vincent Yu maintained a Buy rating and $330 price target for Alibaba shares. Raymond James analyst Aaron Kessler reiterated a Strong Buy rating and $300 price target. KeyBanc Capital Markets analyst Hans Chung maintained an Overweight rating and lowered the price target from $270 to $250.”
Rexaline points out that the Needham analyst was bullish on Alibaba’s improving margins, which came in “better than expected despite investments.” She also touched upon the Needham analysts’ view that increased regulation could be a good thing for BABA, due to the fact that it could end up hurting the company’s competition. She quoted Vincent Yu who said, "We believe Alibaba is navigating the current regulatory environment well and is poised to grow in several business areas such as ride-hailing and food delivery, in which increased regulations can benefit the overall industry as some competition will be eliminated."
Regarding the Raymond James upgrade, Rexaline wrote, “Alibaba increased its share repurchase program from to $10 billion to $15 billion, the largest share repurchase program in its history, the analyst said.” Raymond James appears to be bullish on the buyback because they believe shares to be cheap; Rexaline highlighted this saying, “Alibaba's valuation, at 10 times the estimated market place EPS estimate for 2022, is attractive, the firm added.”
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.
Hans Chung was the most bearish analyst that Rexaline highlighted. He appears to have major concerns about ongoing regulation and the uncertainty that this creates. Rexaline wrote, “Uncertainty around regulation on industrywide data privacy and security issues is also an overhang, Chung said.” She also noted that Chung has worries about near-term guidance recently provided by the company, writing, “On the other hand, the analyst said revenue guidance for fiscal year 2022 appears unachievable.” However, even with these headwinds in mind, low valuation appears to outweigh growth concerns because Chung’s price target of $250 still represents upside potential of roughly 30% from here.
Due to the ongoing volatility that BABA shares experience in the market today, this stock certainly isn’t for the faint of heart. However, it’s rare that investors have the chance to buy into such a well established company posting 30%+ growth that are trading with market multiples. Looking at the credible authors that Nobias tracks, it appears that the broader community shares the bullish sentiment expressed by these 3 Wall Street analysts.
At this point in time, the regulatory headwinds that BABA faces are well known; however, 91% of the credible authors that our algorithm tracks have a bullish opinion of Alibaba shares. In short, it appears that the Nobias community of credible analysts believe that the risk is worth the reward when it comes to BABA shares.
Disclosure: Nicholas Ward has no BABA position. 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.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
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.