- 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.
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.
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.
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.
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.
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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.
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