On Sept. 19, 2014, Alibaba Group (NYSE:BABA) went public. In what still is the biggest U.S. IPO of all time, Alibaba stock priced at $68. It closed on its first day at $93.89, a healthy 38% pop.
On Jan. 6, 2017, Alibaba stock again closed at $93.89. It had spent some 26 months trading mostly sideways, in fact dipping below its IPO price during the early 2016 broad market correction.
But this time, $94 was a buying opportunity. Within three weeks, BABA stock was above $100, and never would dip into the double-digits again. The rally continued at an aggressive pace: BABA cleared $200 in less than 18 months.
Since then, however, the range-bound trading that marked BABA stock’s first two-plus years on the public markets has returned. Monday’s close of $171.16 puts the stock back to where it traded in August 2017 — a little over 26 months ago.
Investors who have long waited for Alibaba stock to finally rally again might hope that history will repeat. The problem at the moment is that, timing aside, it’s not at all clear why or how that can happen.
Is the Trade War to Blame for the Pressure on BABA Stock?
Fundamentally, Alibaba stock looks cheap. It trades at an even 20x FY21 (ending March) consensus EPS. That low multiple comes despite the Street projecting 26% earnings growth next year, on top of a 23% increase this year.
The 20x multiple doesn’t even include potential optionality, most notably through the company’s 33% stake in Ant Financial. That payment company has provided minimal help to Alibaba earnings so far — but raised money at a $150 billion valuation last year. Assuming that valuation holds, Ant would account for over 10% of the current market capitalization of Alibaba Group.
A common answer as to why BABA stock trades so cheaply is the trade war. Investors may well be worried that the impact to the Chinese economy from U.S. tariffs will slow that growth. Move FY21 earnings from a current consensus of $8.65 to something closer to, say, $7.50, and now Alibaba stock trades at 23x forward EPS. That’s a premium to U.S. megacap tech plays like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) despite roughly similar growth in this scenario.
But I’m skeptical the trade war necessarily is the key driver here — or that a resolution of the dispute will lead to a sustained rally in Alibaba stock. After all, BABA’s one big rally on the public markets began not long after the U.S. presidential election.
Surely investors heard Donald Trump during the campaign. His plans likely seemed a potential negative for Chinese companies like Alibaba; indeed, BABA stock (unlike most U.S. equities) declined the day after Trump’s surprise win. And rival JD.com (NASDAQ:JD) has rallied nicely this year amid trade war worries, even if it declined much further during the late 2018 sell-off.
A surprise trade deal no doubt would give Alibaba stock a nice pop. But as with the market as a whole, it seems too simplistic to argue that investors will simply send the stock up 10% or 20% once the trade dispute is resolved. It seems reasonably likely that investors expect a resolution at some point, and thus aren’t pricing long-term effects into Alibaba stock.
Can Earnings Drive Alibaba Stock Higher?
Alibaba shareholders might well look to earnings, due in about a month, as a catalyst for the stock. After all, Alibaba historically has performed well relative to expectations. That includes solid beats with both fiscal Q4 and Q1 earnings.
But those beats have done little for BABA stock. Shares actually sold off following the fourth quarter report. A post-Q1 rally faded quickly.
In fact, it seems like earnings, if anything, could be a negative for BABA shares. Investors expect hugely impressive numbers — and even when Alibaba delivers, don’t always reward the company for doing so. Good numbers probably aren’t enough to bring skeptics in, while bad news can shake the confidence of impatient shareholders.
If bad news is punished, and good news met with a shrug, then Alibaba Group could be in a tough spot ahead of next month’s release.
Trust in Alibaba Group
The broader problem I’ve long noted with BABA stock is that many investors just don’t trust the company. The transfer of Alipay (now known as Ant Financial) from Yahoo! (now Altaba (OTCMKTS:AABA)) and Softbank (OTCMKTS:SFTBY) raised real worries about shareholder rights. The Cayman Islands VIE setup spooks other investors.
The way the company is currently constituted, and managed, means that Alibaba stock is going to get a persistent discount to U.S. names. Much of the argument around the stock centers on just what that discount should be. Is there a risk that one day, Alibaba simply removes the profit rights of Alibaba stockholders? Is Alibaba’s accounting trustworthy?
This problem can be ameliorated over time. With Jack Ma moving on, new CEO Daniel Zhang can put his own imprint on the company. Perhaps a trade war deal will open Chinese markets — and allow for actual ownership in the company, not in a VIE entitled to some of its profits. (This was one of the hoped-for effects of the company’s now-postponed Hong Kong listing.)
But in the meantime, Alibaba stock still is a no-go for many investors — and a stock with significant questions, as Ian Bezek pointed out this summer. That’s not going to change any time soon.
So what moves BABA stock higher? It’s hard to answer that question, but maybe that itself is the answer. It’s possible a rally will simply come once the stock gets too cheap, even for more risk-averse investors. After all, the rally that began in late 2016 didn’t have a spark beyond higher optimism on U.S. stock markets after 26 months of sideways trading. The best near-term hope for BABA stock might be that history repeats on both fronts.
As of this writing, Vince Martin has no positions in any securities mentioned.
