Source: PaxForex Premium Analytics Portal, Fundamental Insight
If you bought $1,000 worth of Alibaba stock at a record high of $317 at the end of 2020, you would only have $230 today - a 77% decline. And while the company's valuation now looks attractive compared to e-commerce competitors like Amazon, investors should pay attention to the company's slowing revenue growth and increasingly unpredictable regulatory environment in China. Let's explore this issue in more detail.
With a 47% market share, Alibaba is the undisputed leader in Chinese e-commerce. Its influence extends across several industries, including retail, logistics, and cloud computing (where it controls 37% of the segment). Alibaba's scale gives it an economic moat through network effects. More customers attract more sellers, which increases competition and the quality of product listings. The e-commerce business also creates a captive market for other services, such as payment processing and other financial services.
Until recently, Alibaba's many advantages helped it maintain a healthy growth rate, with revenues rising 32% year over year to $28.6 billion in 2021. But now the slowdown combined with a tough and unpredictable regulatory environment makes its future look bleak.
Unlike financial metrics such as revenue and profits, political and regulatory risks are extremely difficult to assess or predict-especially in less transparent jurisdictions such as China.
According to Time magazine, Alibaba's problems may have begun after its founder Jack Ma called for reform of the country's financial and regulatory system. Within weeks, the scandalous billionaire was summoned for questioning, and the planned spin-off of Alibaba Ant Financial, a $37 billion subsidiary, was put on hold despite the earlier green light.
This was the first of many negative regulatory actions against Alibaba (usually involving alleged antitrust violations). And for investors, the episode highlighted a troubling problem that could haunt the company.
The deterioration of relations between the U.S. and China is another troubling signal. In October, the U.S. Department of Commerce announced important rules designed to restrict the sale of semiconductors and chip-making equipment to Chinese companies. For Alibaba, this is a big blow to its ambitions in technologies such as cloud computing, which rely on cutting-edge hardware. In the second quarter, Alibaba's cloud segment accounted for 9% of total revenue (17.7 billion yuan, or $2.4 billion).
Alibaba's first fiscal quarter results show a deterioration in the company's financial position. Revenue on an annualized basis was unchanged at $30.69 billion. A 1% decline in the e-commerce segment in China was offset by a 10% increase in the cloud computing segment. Adjusted earnings before interest, taxes, and depreciation (EBITA) fell 18% to $5.14 billion as the company struggled with issues such as China's zero-tax policy, which put pressure on its margins.
While the company's management did not provide guidance for the future, issues such as China's tough COVID-19 policy and a ban on U.S. chip exports could turn the current downturn into a long-term problem.
While Alibaba's projected price-to-earnings ratio of just 9.3 is low compared to U.S. competitors such as Amazon (which trades at 48 times projected earnings), the political and regulatory factors holding the company back pose risks that are difficult to account for just by looking at its financial performance. Investors should avoid Alibaba stock because these problems don't seem to be going away anytime soon.
As long as the price is below 80.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 65.67
- Take Profit 1: 58.00
- Take Profit 2: 45.00
Alternative scenario:
If the level of 80.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 80.00
- Take Profit 1: 88.00
- Take Profit 2: 103.00
