Why Do Investors Love Alibaba? It's A Chronic Underperformer

Summary

• Alibaba has been one of the worst performing Big Tech companies to own since its U.S. IPO in 2014.
• Chinese government interference in 2020-21 operations, and a quickly slowing economy inside China add new obstacles for large gains.
• The stock is not cheap enough, and lacks significant buying momentum for me to seriously consider it for investment.

Sean Gallup/Getty Images News

I remain puzzled at all the bullish hype and stories about Alibaba (NYSE:BABA) (OTCPK:BABAF) on Seeking Alpha and elsewhere over the years. The company is a leading internet retailer in China, with a number of related growth businesses focused on digital finance and cloud offerings. In many respects, Alibaba is the Amazon (AMZN) equivalent for China. However, a more difficult regulatory environment in this nation (controlled by one-party Communist thinkers), plus an extraordinary initial offering price for American investors in 2014 have hamstrung stock gains.

The fact of the matter is the stock has only doubled since U.S. trading opened seven years ago, and cannot (will not) pay a U.S. dividend with tight capital controls in China. The total return since its IPO has averaged +13% annually. Definitely not a bad return, but only an average gain vs. the S&P 500 total return, and FAR, FAR below the gains of Amazon or just about any U.S.-based Big Tech company. Why so much bullishness by analysts and investors? China has more computer-savvy youngsters than America. So, oversized profit growth must be in the offing - is the bullish argument in a nutshell.

Weak Gains

A little dose of reality. Whether looking at 1-year, 3-year or 7-year comparisons, Alibaba has been DEAD LAST for investment gains vs. most mega-cap alternatives in America's online commerce field or the biggest capitalization technology names.

Below are charts comparing Alibaba's total return performance, including zero for dividends, vs. Amazon, Microsoft (MSFT), Alphabet-Google (GOOG) (GOOGL), Facebook (FB), Netflix (NFLX), Adobe (ADBE), Wayfair (W), and eBay (EBAY), alongside the large capitalization index returns from the SPDR S&P 500 ETF (SPY) and Invesco NASDAQ 100 ETF (QQQ). If your goal as an investor is to avoid subpar picks, Alibaba is one to think twice about owning.

Investment Outlook

Expanding Chinese regulation this summer on foreign-listed firms like Alibaba has increased the risk local control initiatives will dramatically reduce the long-term upside potential of your investment. Chinese stocks in general have suffered for months from the drastic crackdown on foreign-listed tech stocks. The government seems intent on rewriting the rules for how and where Chinese firms operate.

This follows a locking of horns with the Chinese central bank over the proposed Ant spinoff in early November, which has kept selling pressure on Alibaba's stock for months. In the end, the Ant IPO was pulled. Many observers believe CEO Jack Ma has become too rich and independently powerful for the Communist leaders of the second-largest economy in the world.

However, even if we could wave a magic wand and remove Chinese efforts targeting the free-market decisions of business managers, Alibaba is still a distance from being viewed as a bargain choice for long-term investors in the summer of 2021. Below I have charted trailing price to sales and earnings multiples vs. American technology peers. I agree valuations appear to be in the middle of the range vs. the group. But is this price enough of a discount, measured against the risks of further Chinese crackdowns on businesses, or heaven forbid an out-of-control Delta COVID-19 variant spread problem causing a recession in Alibaba's area of operation, sales, and consumer demand? [If you want a cheap upfront stock valuation with underappreciated growth characteristics, look at eBay.]

In addition, Alibaba's income generation is projected to continue expanding at subpar rates vs. the group. Below are Wall Street analyst estimates for EPS growth rates into 2024.

A review of the daily trading chart over the past year does not create any enthusiasm either. The first data point I notice is the horrible price performance vs. a sharply rising U.S. equity market in 2021, represented by the S&P 500 index. Alibaba has underperformed the U.S. market by -42% in the past 52 weeks! Nearly all the momentum indicators I follow closely are muddled to negative right now. Can the stock experience an unexpected turnaround from the rotten downtrend it seems to be stuck in? Sure, but why not invest in a company that has already reversed higher or is in the middle of an existing uptrend? Too much guesswork for my tastes.

Final Thoughts

I wrote a bearish note on Alibaba in 2017, my only Seeking Alpha effort on the name until today. I personally don't get excited about Alibaba's investment proposition, either bullish or bearish in argument during July 2021. My expectation is for a long-term performance future, much like its past. If you are satisfied with 5-15% total returns annually for the next 3-5 years, Alibaba could be part of your portfolio construction. Otherwise, hundreds if not thousands of other equity investments will deliver the same type of risk-adjusted gains. I have a Neutral rating on the stock for an investment grade.

I have been resolutely bullish on the cheapest online commerce stock - eBay - for several years in my writings. My last eBay article at the beginning of the year anticipated a period of strong gains vs. Amazon specifically in 2021, and this suggestion has proven a sound idea. Why not spend your time and energy researching and owning stocks with the best math to back them up?

I hope this article gives you some enlightenment on my investment process, and why the vast majority of stocks never fit a strict buy definition of undervalued fundamentals combined with rising technical momentum. For buy-and-hold investors, there are plenty of other equities with a smarter combination of bullish factors to consider. Could Alibaba reverse higher and surprise me? Absolutely it could. However, I am focused on stock picks with a stronger mix of factors necessary for success. The choices where the odds are stacked in your favor tend to generate superior returns in a trading world that can feel quite random, day to day and month to month. Food for thought anyway.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

Analyst’s Disclosure: I/we have a beneficial short position in the shares of SPY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

Comments

[Poltad7]

Nice article that has aged well

[Macking]

The stock has lagged, that much is true. A big reason for this is the “China discount.” Does the market continue to discount the stock going into the future? We will see. But as a strong rest of the world play, I think you would be hard-pressed to find another company positioned like $BABA. I disagree with the assertion that this is just “the Amazon equivalent in China.” It is so much more than this. A more accurate comparison is the Amazon, Google, Square, Shopify and JPMorgan of China—all in one.

While China growth could moderate somewhat over the next 5 years, there are large untapped opportunities in Africa and SE Asia, as well as solid potential in Europe. I expect growth to continue at ~20% for both top line and earnings over the next 5 years. These fundamentals will eventually drive this stock higher.

I am long $BABA and plan to hold for the next decade.

[Paul Franke]

@Macking Thanks for the comment.

[greg24211]

Past performance does not indicate future results. Just because it has underperformed as a stock - doesn't mean it will moving forward. In fact, it seems the opposite is more likely given the fundamental strength of the company.

As a Chinese stock I have to hold my nose to own BABA, but it's such a fat pitch at these prices I am in - went long around $215-$220 and plan to hold a long long time unless something concrete changes with China.

[jeffk100]

Totally with you on this article. Your bullet points are spot on. I trade baba a lot, particularly through options, no more than 4 weeks out. That's ALL its good for. Terrible investment for what it is. I read so many articles about how this is "the bottom", the "valuation is too compelling", the "risk is priced in", "there is a margin of safety in buying now because its so low", "China as allowed VIEs for 20 yrs and so will continue to", etc. All these arguments are crap.

In effect, baba does not control its own destiny, a dictatorship does. There is no quantifiable bottom, no valuation that is compelling, no calculating of risk and certainly no price that acts as a margin of safety when that same dictator can completely pull the rug out, cap your business, break you up, steal your data and share with others, even go so far as to delist you. These authors writing this crap really are fools. When they can calculate the regulatory/political risk, figure out a discount for it, then we'll talk. Otherwise, they are just more fools chasing a super risky dream and leading the sheep to potential disaster.

Again, you are spot on.

[Poltad7]

@jeffk100 pretty spot on and this has aged well

[kimboslice]

I enjoyed the article.
I have a few shares of BABA ADR which I bought for the hell of it really.
I’m going to sell it all pretty soon.
“You don’t really own it” is a reason, another is I don’t like investing in China stocks, and I prefer something else like eBay, Roku, etc.

[InvestRite#1]

In addition to BABA's undeperformance, why would I put $$$ into a Chinese economy when I can stick with AMZN and keep the $$$$ here in the US....this will never happen. Putting cash in my pocket comes with terms like caring about which country gets the cash

[Rosy1Rosy]

@InvestRite#1 news flash…if you invest in any number of US multi nationals ( GM, Coke, Starbucks, Lilly, Walmart, etc etc ) you are indeed putting dollars into the Chinese economy.
Cheers !

[Ra's al Ghul]

I fully adhere to that title. . #BABA It's A Chronic Underperformer

[Madalin Constantin]

one of the worst articles i have ever read.... Only numers and price action.... And you call yourself an investor

[Toni C]

Very confonting to find a negative article about BABA from this author. Doing the opposite tends to work very well. I bought HRB when this author was shorting it and nearly doubled my money.

[Toni C]

VIAC is another example. He shorted it at 15, and it run up to 100.

[Paul Franke]

@Toni C I have written several bullish articles on both VIAC and HRB the last two years.

[Toni C]

@Paul Franke

Short Sale Picks: April 2020

seekingalpha.com/...

Sorry, after reading this article back in April 2020, you lost my credibility and I decided not to read any more articles from you. So I have no idea if you changed your mind later on.

Today I made an exception and read the summary points, for which I disagree.

[Cognoscente]

hope Baba can be delisted from US right away, and is only listed in China, and Like this, its value can fully unfold. The US investors are really biased towards Chinese ADRs

[Master Leong]

because the market consistently undervalues it
it revenues and earnings growth is amazing

[William Boyd]

You write these two statements in the same paragraph:

"even if we could wave a magic wand and remove Chinese efforts targeting the free-market decisions of business managers"

"is this price enough of a discount, measured against the risks of further Chinese crackdowns on businesses"

😐

[Growthsmowth]

More articles like this please - SA baba perma-bulls need to stop leading retail over a cliff and need to continue evaluating fundamentals in light expectations for how a 2nd-world [CCP] country listed on a 1st-world stock Exchange might behave.

Nothing wrong with Xi but folks need to stop pretending Alibaba wouldn’t produce similar cagr with 900% more Party oversight and less foreign capital.

[irvfisher67]

@Isg2008 I invite you to consider how 1rst-world 2nd-world 3rd-world paradigm has expired and is in any case somewhat western-supremacist, as it was intended to be.

Besides, America by that coinage would be a second-world economy as we have low life expectancy, high infant mortality, low LITERACY, high medically uninsured, high child hunger, etc.

The permabull lead-retail-off-a-cliff is the inflating of US assets and denial of USD devaluation.

All time highs! America is the greatest country ever! America is a free market! Americans earn more than ever! All false in real terms.

[Growthsmowth]

@irvfisher67 America is not a second-world country and American equities will continue to rise, regardless of their place in the world economy.

Just short America and be quiet.

China still has half a billion people still living in poverty and a government that is on track to copy the 60’s Russian debt crisis. Get over yourself

[irvfisher67]

@Isg2008 Tautology much? 1rst world means literally "America and allies" but colloquially means a developed country.

As America is the worst of all developed countries, in 100 statistics and apparent to travelers, it os fair to compare America to "2nd World," which typically have better literacy, access to education, access to healthcare, and basic rights like the ability to stay home sick during a pandemic without losing ones job.

[jorisderooij]

I appreciate your analysis Paul, and the past return numbers don't lie.
But investing is about the future, not the past. Personally, I am betting that alibaba, helped by Chinese macro tailwinds, will outperform over the next 7 years. Over the long time stocks follow earnings, and earnings will go nowhere but up.

Are you open to the possibility that you might be anchoring on the past?
Munger, Pabrai and others took sizeable positions expecting outperformance.

Thanks again your down to earth article. Research is spot on.

[Armagheddon]

@jorisderooij Spot on. As Buffet says, stock couldn’t care less what price was bought at. Eyes forward.
Btw, Guy Spier - Aquamarine Capital and Greg Alexander - Conifer Management just announced Q2 large buys of BABA. No offense, @paul Franke, but I do like their track record better 😜.

[GE Smith]

@Paul Franke this topic would benefit from more head to head comparison on a business performance basis between BABA and peers (as opposed to share price)

[price_is_rich]

@GE Smith Agree. I also wanted to see it from business perspective while reading the article.

[freddie28]

"Food for thought anyway." Agreed - while I found your article an informative read, I do not use backwards looking price movements as a way of analyzing the potential long-term purchase of a business.

[Aiki Investor]

Difficult to appreciate the cold truth of your conclusion. I accept. Thank you for your willingness to disagree with the Baba bulls.

[Another Mountain's Rock Investing]

@Aiki Investor all he shows is past performance, not talk about the performance of the company. Hardly bearish either way because undervaluation is often a professionally cited reason for investing by Buffet, Lynch, etc.

[Aiki Investor]

@another Mountain's Rock Investing. I understand your point. Yet I bought Baba because it is a great company and perfectly positioned. Unfortunately I lost my confidence in Baba’s ability to grow without PRC interference. I’m selling.

[price_is_rich]

@Aiki Investor Have you read/listened to their most recent earnings call? They mentioned that aside from the penalty from Jack Ma’s criticism. PRC is focusing on addressing potential monopoly and promoting free trade. They are also tightening data security laws (for people and PRC benefit of course).

[Chronicles of Riddick]

Paul, the reason for Alibaba's underperformance and ill gotten sentiment in the markets is not due to fundamentals but rather the opinion of the condescendi, speculators and the 'click' who deem it to be or not too be for reasons waaaay above our pay grades.

[sstefanick58]

Just my personal preference, but I only trade options on China stocks. They limit my exposer and quite frankly they pay better than trying to time an entry, exit strategy around all the influences that drives them.

[Aiki Investor]

@sstefanick58 Smart. I should have taken your approach. How can an investor buy long with PRC issues?

[Deverix]

I owned it for several years and the CCP finally ran me off.

An investment in BABA in the US is an American depositary receipt (ADR), not actual shares in the company... an ADR held in a communist country that is actively knee-capping their successful businesses. They could decide tomorrow that ADR's are simply illegal in China. No one thinks they will, but they could, and that should run us all off, IMO.

[Chronicles of Riddick]

@Deverix One could say the American government knee caps it's successful businesses too. At least the Chinese admit it and tell you who they are in your face, not so with the US.

[Aiki Investor]

@Deverix Another reason for me to get out.

[Djreef1966]

@Deverix China then will the truly be un-investible. That would create a mass exodus of foreign investment that would absolutely destroy their economy and their political institutions, as well. I’m thinking they already know this and aren’t stupid enough to even start down this road.