The rally did not last because traders failed to account for the ongoing political risks and the massive “forced donation” that the conglomerate made to the Chinese Communist Party’s “Common Prosperity” initiative.
When Could Alibaba Stop Falling?
Value investors look at Alibaba as a company that’s trading 50% below its highs of last year. But BABA stock reached its 2020 highs before Alibaba’s founder, Jack Ma, criticized the Chinese government.
Days after Ma spoke publicly against China, the government canceled the scheduled initial public offering of Ant Financial, in which Alibaba has a big stake. Beijing’s decision prevented Alibaba from unlocking the massive value of Ant, its fintech subsidiary.
China may impose further restrictions on Ant Financial. It could break up Ant’s unit, Alipay, by separating the division’s loan business from its app. That would weaken the cross-selling potential between Ant and Alipay, lowering Alipay’s value.
Angry Alibaba investors may think that China is targeting the company because of Jack Ma. China issued hundreds of regulatory rules in the last few months to weaken the power of the country’s corporations over its citizens. For example, the government introduced regulations to protect consumer privacy and penalize monopolies
Indirectly, banning children from playing online games for more than three hours per week, as the government did, also hurt BABA stock. That’s because all Chinese technology firms will trade at lower valuations since the government’s rules will restrain their growth.
Consequently, Alibaba’s e-commerce app could attract fewer users, and its cloud unit will be negatively affected as video-game makers’ utilize the cloud less.
Alibaba’s $15.5 Billion Pledge
On Sept. 2, Alibaba pledged to invest a whopping $15.5 billion in the next five years in Beijing’s common prosperity drive. Among the initiatives to which it will donate are technology innovations and support for the economic growth of less developed regions.
Investors will end up paying the bill as Alibaba uses its profits to fund this payment. On a positive note, China is reallocating the company’s profits to the middle class, potentially enabling millions of middle class Chinese citizens to buy more goods from Alibaba. But on the other hand, Beijing may demand more payments from Alibaba.
In April, China fined Alibaba a record $2.75 billion for allegedly abusing its dominant market position. That fine only amounted to 4% of Alibaba’s 2019 domestic revenue.
No Catalysts in Sight
According to Stock Rover, Alibaba scores a 99 out of 100 on growth and a 95 out of 100 on quality, as depicted in the chart below.
Those numbers may encourage investors to look at Alibaba as a great growth stock. Another interpretation, however, is that the company’s growth days are potentially behind it for now. As a result, the high scores are not a good reason to buy BABA stock.
Beijing’s new regulations will take effect on Nov. 1. In a best-case scenario, Alibaba’s slowdown will not last for too long after that day. Investors could bet that BABA stock is already pricing in the new restrictions. That upbeat view also assumes that Alibaba will not be forced to make anymore large, surprise payments to the government.
According to Stock Rover, nearly all analysts rate Alibaba’s shares a “buy.” (Please see the chart to the left). Their average price target on BABA stock is almost $270,according to Tipranks.
But readers should not view the bullishness of these analysts as a good reason to buy the stock. That’s because the analysts have not yet lowered their price targets to account for the growing political risks in the region.
Furthermore, China faces growing risks from Evergrande, a property developer that took on too much debt during China’s real estate boom. With Evergrande’s debt trading at 25 cents on the dollar, the market expects the firm to file for bankruptcy.
The Bottom Line on BABA Stock
Before buying or holding Alibaba’s shares, consider Evergrande’s risks to the Chinese economy. Also, wait for the government to ease its restrictions on the tech sector before opening a bullish position in Alibaba’s stock.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.