The place Will Alibaba Be in 1 12 months?
The past year has been volatile for us Alibaba (NYSE: BABA), China’s largest e-commerce and cloud platform company. The share price fell with the broader market when the COVID-19 pandemic hit China in early 2020, but rebounded as online sales rose and in-home measures increased the use of its cloud services.
However, a number of regulatory challenges ended Alibaba’s rally abruptly towards the end of the year. Chinese regulators have suspended Alibaba’s long-awaited IPO of Fintech subsidiary Ant Group, fined Alibaba for unauthorized acquisition of InTime Retail, and then launched an antitrust investigation into its e-commerce business.
Meanwhile, the “disappearance” of Alibaba co-founder Jack Ma, rumors of China’s plans to nationalize Alibaba and Ant, the delisting of threats in the US, and the Pentagon’s desire to add Alibaba and Ant Tencent (OTC: TCEHY) an investment blacklist of their alleged links to the Chinese military all cast a dark cloud over the stock.
However, Jack Ma recently reappeared in public, and the Treasury Department blocked the Pentagon’s push against Tencent and Alibaba just before President Joe Biden’s inauguration. Alibaba’s stock rebounded on these developments but lagged behind many of its peers. Alibaba’s stock is up about 17% over the past 12 months Baidu (NASDAQ: BIDU) and Tencent are up 87% and 71%, respectively.
Will Alibaba catch up with its “BAT” colleagues this year? Or will it continue to have problems if regulators kneel down and allow rivals to do their core business JD.com (NASDAQ: JD) and Pinduoduo (NASDAQ: PDD) gain ground?
Is Alibaba’s business still basically strong?
According to eMarketer, Alibaba controlled 56% of China’s e-commerce market last year. JD.com and Pinduoduo held 17.1% and 10.5% of the market, respectively. All three companies operate different business models.
Alibaba’s main marketplaces, Taobao and Tmall, are mostly paid listing platforms. It does not take inventory, but fulfills orders through its logistics subsidiary Cainiao. JD.com takes over inventory and fulfills its orders with its logistics network. Pinduoduo has paid offers like Alibaba, but encourages buyers to band together on bulk purchases.
Alibaba generates most of its sales and profits from its core business in retail, which includes all online marketplaces, brick and mortar stores and logistics services. The company subsidizes the growth of its other three unprofitable businesses – Alibaba Cloud, its digital media and entertainment division, and its innovation initiatives – with the profits from its core retail business.
This cycle allows Alibaba to expand its ecosystem with other services, including streaming media, cloud services, video games, and even a search engine, to widen its moat against Tencent, Baidu, and other tech giants. It has also enabled Alibaba to have robust sales and net income growth over the past five years:
Growth (YOY) |
2017 |
2018 |
2019 |
2020 |
6M 2021 ** |
---|---|---|---|---|---|
revenue |
56% |
58% |
51% |
35% |
32% |
Net income * |
35% |
44% |
12% |
42% |
33% |
Analysts expect Alibaba’s growth to accelerate in the second half of the year, with full-year revenue and earnings rising 48% and 35%, respectively. However, investors shouldn’t put too much faith in these projections, which may not fully reflect the impact of China’s recent antitrust measures on Alibaba’s e-commerce business.
Unpredictable headwinds ahead
Alibaba’s online marketplaces growth slowed even before the antitrust investigation, and the company was increasingly reliant on lower-margin companies – including brick and mortar stores, wholesale channels, cross-border marketplaces, and Cainiao – to grow core retail sales.
As a result, Alibaba’s core business adjusted EBITA margin declined to 35% in the second quarter, down from 38% in the first quarter and the year-ago quarter. That decline may seem minor, but this downward trend could continue and affect Alibaba’s ability to support its other unprofitable businesses.
To make matters worse, China’s antitrust authorities are reportedly planning to prevent Alibaba from locking traders into exclusive deals. JD, Pinduoduo, and several distributors have labeled these offers – which prevent Alibaba’s sellers from placing their products on other platforms – as anti-competitive. If these new rules are passed, Alibaba merchants could list their products on other platforms, presenting Taobao and Tmall with unprecedented challenges.
Along the road
Alibaba is currently trading at only 20 times its forward profit, compared to a forward P / E ratio of 29 and 21 for Tencent and Baidu, respectively.
Alibaba’s stock looks cheap, but it is arguably facing stronger regulatory headwinds than Tencent and Baidu. Tencent’s recent mergers and fintech deals are currently under scrutiny, but its core gaming, social media and advertising businesses remain pretty safe. Baidu is widely considered an outsider in China’s developing technology market, despite owning the country’s largest search engine. Therefore, it is not an important antitrust goal.
I believe Alibaba’s valuation will limit its downside this year, but I also believe it will outperform Tencent, Baidu, and other Chinese tech stocks as China’s antitrust authorities find new ways to take over the dominant e-commerce and marketplace Curb cloud business. As such, it’s still a decent game for China’s growing tech sector in the long run, but investors shouldn’t expect it to make big hitting returns this year.
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