Alibaba Stock: The Perfect Storm

Summary

• Downtrends, like uptrends, don’t last forever.
• The market is no longer rational about Alibaba’s e-Commerce value.
• Alibaba’s ADRs are unlikely to get delisted.

Guang Niu/Getty Images News

Shares of Alibaba (NYSE:BABA) are in a downtrend and the market has turned negative on Chinese Big Tech. Macro risks are growing as supply chain challenges persist and inflation simmers. But, like buying during the COVID-19 panic, going against the market can pay large dividends. For that reason, I am increasing my investment in Alibaba by 100% and look forward to doubling my money over the next five years!

Alibaba's shares touch new lows this week

It is not easy to defend an investment in Alibaba right now. The Chinese internet retailer got caught up in the Chinese Communist Party's rapidly accelerating campaign to crack down on monopolies this year. Alibaba received a $2.8B anti-trust fine from the anti-monopoly agency earlier this year, which represented 4% of Alibaba prior-year domestic revenues, and the regulator continues to breathe down Alibaba's neck: The state agency tasked with overseeing monopolies imposed a new round of fines on tech companies totaling $3.4M this month.

The CCP's crackdown on monopolies is not Alibaba's only problem. Shares of Alibaba have fallen into a downtrend that now lasts for a year and the setup has become very bearish. Alibaba's moving averages supplied bearish trading signals months ago, and RSI and MACD, two technical indicators closely followed by traders, also give bearish signals.

(Source: Seeking Alpha)

Additionally, the world is grappling with a new Coronavirus variant which first emerged in southern African countries. The variant, feared to be highly transmissible, has already resulted in travel curbs from the U.S. and European countries. The supply chain crisis, which affects e-Commerce conglomerates focused on cross-border transactions, is not resolved. Inflation is simmering, devaluing incomes and wealth, while interest rates are still not moving up.

These developments, together, have created a perfect storm that has led to a significant drop in stock valuations, especially in Chinese Big Tech. Shares of Alibaba fell to new lows this week...

Data by YCharts

There are sectors that continue to see very high sales multiplier factors, like non-FAANG cloud-based technology, electric vehicles and semiconductors, but e-Commerce companies are not part of this group. Alibaba, evaluated solely on prospects for e-Commerce growth, is one of the most undervalued e-Commerce stocks in the market today.

Alibaba's e-Commerce growth remains deeply undervalued

Blending all the distractions out, Alibaba represents deep value from a strategic e-Commerce perspective. Alibaba is the largest e-Commerce company in China and counts more than 1.2B people as its customers. Alibaba owns the largest e-Commerce ecosystem in the world and is rapidly expanding into adjacent markets in Southeast Asia. Alibaba added 62M new customer accounts in Q2'22, showing 5% growth quarter over quarter. It added 42M new accounts to its platform in Q1'22, meaning the e-Commerce conglomerate signed on more than hundred million new customers in just six months. There is definitely not slowdown in Alibaba's customer acquisition…

(Source: Alibaba)

There is also no slowdown in Alibaba's e-Commerce growth either. Alibaba e-Commerce business soared 31% year over year in the second-quarter to 171.2B Chinese Yuan ($26.9B) while total revenue growth -- including Cloud Computing and Digital Media & Entertainment -- surged 29% year over year to 200.7B Chinese Yuan ($31.5B). Alibaba's e-Commerce growth rate even showed an acceleration, year over year, since the firm's e-Commerce growth in the year-earlier period was just 29%. Additionally, Alibaba's e-Commerce is dependent on the Chinese market for growth: Excluding logistics revenues, 77% of sales came from China's domestic market in Q2'22, making Alibaba much less reliant on international growth for business expansion than feared. E-commerce is still Alibaba's bread and butter, although this is set to change in the future as investments in Cloud Computing and Digital Media improve Alibaba's diversification and add new revenue sources.

(Source: Alibaba)

Top e-Commerce value at a bargain price

Alibaba must be the best e-Commerce value in the whole market these days if you believe in the long term potential for global e-Commerce growth, especially in China. Amazon and eBay (EBAY) can't compete with Alibaba as the Chinese e-Commerce conglomerate has by far the lowest sales multiplier factor. There are good reasons why Alibaba's sales are valued at a discount relative to the sales prospects of Alibaba's US rivals, but the discount may just have gotten too large...

Data by YCharts

Alibaba's risks

There are many risks present with Alibaba. Supply chain issues and delays in shipping time could lead to a high number of cancellations and refund requests for orders that are currently on their way to customers outside of China. Inflation is a concern for so many different reasons, but especially because it lowers the incomes of consumers which may negatively affect consumer confidence. The emergence of the Omicron variant adds to concerns over economic growth. The CCP may impose new anti-trust fines on e-Commerce conglomerates. Alibaba could also be forced to sell off parts of its growing business empire, especially parts of Ant Group, Alibaba's digital payments provider whose IPO was blocked by the CCP last year.

What I don't believe is a significant risk to Alibaba is that the ADRs get delisted. ADRs of Chinese Big Tech suffered greatly in 2021, at least in part because fears of a possible delisting are growing. A delisting, however, would be an extreme, and unlikely, step for regulators to take. It would be much more sensible for U.S. regulators to tighten listing requirements such as requiring U.S.-listed Chinese companies to get audited by an American accounting firm. A complete delisting would be a rather radical step that would unnecessarily make the problem much worse than it is.

Addressing criticism

Alibaba is not a momentum trade. I don't claim to know when a stock hits a bottom and I don't expect shares of Alibaba to immediately return to $300. What I try to do is this: I want to buy large companies with attractive growth potential and large moats at a discounted price. Then I hold these investments longer term. I believe that just because a stock has dropped in the past doesn't mean it will continue to drop... just like a stock that has recently risen, will not continue to rise in perpetuity. Volatility is part of investing and I do not plan to be proven right or wrong within the next five weeks, but rather over the next five years.

Final thoughts

Alibaba is a long term investment and this is why I am buying more shares of BABA. Alibaba is now a top 5 holding for me, just like AMD, Micron, Ethereum and PayPal. Things may not radically improve for Alibaba short term, but the firm's e-Commerce value is getting more and more ignored… which makes Alibaba a great deal.

Shares of Alibaba may be in a downtrend, for now, but no downtrend lasts forever. I believe in Alibaba's e-Commerce value and China's potential for growth. Alibaba continues to sign on an insane amount of new customers to its e-Commerce platform. Once the market is capable of dealing with facts again, shares of Alibaba are set to revalue higher.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BABA 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.