As the Alibaba (NYSE:BABA) stock price rallies again, something’s still missing: Alipay. Alipay and its parent company, Ant Financial, aren’t owned by Alibaba … yet. Still, investors already are pricing their value into BABA stock.
Indeed, my InvestorPlace colleague Wayne Duggan highlighted Alipay as a “secret weapon” for Alibaba. Wall Street analysts, as Duggan noted, have taken a similar shine to the payment product. It’s been compared to PayPal (NASDAQ:PYPL) and Square (NYSE:SQ). Alipay seems to be a reasonably large part of the BABA stock bull case.
But Alipay — or at least its history — is part of the bear case for the stock, too. That’s worth remembering as the BABA stock price tries to make another run to the highs.
Alipay and Yahoo!
Back in 2011, Alibaba’s then-CEO Jack Ma basically took Alipay from Alibaba. Yahoo!, now Altaba (NASDAQ:AABA), which owned 43% of Alibaba at the time, saw its stock fall almost 10% as a result.
For its part, Alibaba insisted that Yahoo! knew about the move, which ostensibly was made to satisfy new regulations which prohibited foreign ownership of payment companies. Yahoo! denied it had been told about the transfer ahead of time.
The two companies settled the dispute in 2011 by giving Alibaba a 37.5% share of Alipay profits. That was better than nothing for Alibaba and its shareholders — but a far cry from the 100% of earnings to which they felt entitled.
Then last year, Alibaba said it would take a 33% stake in Ant Financial, Alipay’s parent, as part of its rights under an amended version of the 2011 agreement. Alibaba will forego its profit sharing in exchange for the newly issued shares.
But more than a year later, that deal hasn’t closed. Management commentary has been limited. The regulatory process no doubt is difficult. Still, given Alibaba’s history, investors could be forgiven for wondering what, exactly, is taking so long.
Questions Surrounding Alibaba Stock
The issuance of the 33% stake, should it close, would by no means settle the concerns surrounding Alipay and Ant Financial. The fact that Ma transferred the asset away from Alibaba and to himself suggests a risk of similar self-dealing by other executives. Meanwhile, as Alibaba admitted in filings ahead of its IPO, the supposed restriction that drove the move never materialized. For investors who struggle to trust Alibaba, the Alipay saga is a key reason why.
Meanwhile, Alipay’s profits evidently plunged last year, with Alibaba’s share of fees from Ant Financial dropping by 85% in Alibaba’s fiscal 2019. Commentary in the company’s 20-F and on conference calls suggest that Alipay is investing for growth. But given that the app supposedly is already entrenched in China — with some 700 million users, per management commentary — that decline seems enormous, even with spending on new markets.
All the while, there have been repeated steps in the direction of an Ant Financial IPO. Those efforts date to 2016. Yet a potential offering has been pulled on multiple occasions, most recently in 2018.
All of these issues, for bears, go to the idea that Alibaba simply isn’t trustworthy — and that the BABA stock price still doesn’t reflect that problem. There simply are so many risks here. Alibaba stock isn’t even ownership in Alibaba itself. A valuable business unit was pulled out of the company for reasons that still remain unclear. Alipay suddenly isn’t profitable while at the same time the Chinese economy is slowing and regulators are pushing back. What else is going on here?
The Case for BABA Stock
It’s possible these risks are just the price of being a owner of BABA stock. (Or, more accurately, a shareholder in a Cayman Islands-based variable interest entity with a contractual right to Alibaba’s profits.) And it’s possible that over time, China’s financial system will become more open — and more regulated. Meanwhile, as I wrote this month about iQiyi (NASDAQ:IQ), some investors see the opportunity in China as more than worth the risks.
But there are going to be bumps along the way — one reason why the Alibaba stock price has struggled to rise with any consistency. On its face, ownership of China’s e-commerce leader at a reasonable, if not attractive, earnings multiple seems like a slam dunk. But whether it’s Alipay, the new listing in Hong Kong, or shareholder rights, there are real concerns about Alibaba stock at the moment. And until that changes, BABA may stay stuck.
As of this writing, Vince Martin has no positions in any securities mentioned.