A Bearish Narrative on Alibaba Shares Based on Realities

Alibaba (NYSE:BABA) and Alibaba stock have fared well during the pandemic. Stock prices are near all-time highs and investor sentiment surrounding the company is high.

Alibaba (BABA) logo on the side of a glass-walled building.
Source: testing / Shutterstock.com

Ultimately, the company looks to be trending upward. Yet, trade tension between the U.S. and China threatens shares along with ongoing concerns regarding Chinese business practices. 

Those narratives aside, Alibaba’s structure and strategy ought to give bulls a bit of pause. 

Alibaba’s Segments

Alibaba’s operations are segmented into four areas: commerce, cloud, digital media, and innovation initiatives. Commerce operations prop up the entire company. In fact, only commerce is profitable – a trend that has continued at the firm for the past three years. 

For the year ended March 31, EBITA margins were as follows:

  • Core commerce 38%
  • Cloud computing -4%
  • Digital media -41%
  • Innovation initiatives -133%

There has been a lot made of Alibaba’s cloud and it may well be a fine product. However, in terms of Alibaba stock, the cloud computing segment is currently a drag. It costs the company money. Amazon’s (NASDAQ:AMZN) AWS cloud business on the other hand, reports around 30% profitability. 

In terms of overall contribution to net sales, each company’s cloud division is quite similar at roughly 10%. The moniker ‘The Amazon of China’  is fairly apt. 

U.S. Distancing Underway

A lot has been made of the Holding Foreign Companies Accountable Act as it pertains to Chinese companies listed on U.S. exchanges. Rightly so. The bill was aimed squarely at Chinese companies. Regardless of whether it passes into law or not, there are a few things to remember.

First, a shift is already underway and the distance between China and the U.S. is growing, not shrinking. 

Second, the timeline over which this will affect Alibaba is fairly long. It took a Republican controlled Senate over a year to pass the bill. A majority Democrat House of Representatives should move slower. 

But Chinese companies aren’t sitting around. 

Hong Kong Listing

Back in November 2019, Alibaba listed shares on the Hong Kong stock market. It was the world’s biggest cross-border dual listing. Alibaba stated it wanted to tap a larger capital base by listing shares on the Hong Kong market. This is very logical. But at the same time it also signals a retreat from U.S. markets. 

It should be noted that the NYSE shares have had more inherent volatility than that of their Hong Kong counterpart in 2020. U.S. shares ranged between $149.26 and $230.48. HK shares traded between HK$170 to HK$223.60. This trend is likely to continue. 

Shanghai/Shenzhen Next?

Alibaba states in its 20-F that it may list its shares on Shanghai or Shenzhen stock exchanges as well. Should this come to pass it will lead to fluctuations in ADRs and U.S. shares. More to the point, it is a clear indication that Alibaba is not prioritizing U.S. based capital sources. 

Put differently, your U.S. Alibaba stock shares are likely to be lower in the pecking order in the future. And the shift is only accelerating. 

Do U.S. Shareholders Care?

No, not really. Following the HK listing, BABA investors showed some initial skepticism over BABA stock. But that clearly dissipated and bulls are firmly in control of the stock. 

A Nasdaq.com article from last year remains relevant in my mind:

“One of the big concerns long voiced by skeptics toward Alibaba is that it doesn’t actually guarantee ownership of Alibaba Group itself. That’s not the case for U.S. companies, in which a share of stock provides direct ownership. Even when overseas companies are owned via ADRs (American Depositary Receipts), those ADRs still represent ownership of shares directly in companies listed on non-U.S. exchanges. But for BABA stock, the story is different. U.S. owners of BABA stock don’t have any ownership in the actual company. Instead, they have a contractual right to the profits of Alibaba Group.”

Takeaway on Alibaba Stock

I was neutral on Alibaba stock when I first wrote about it a few months ago. The more I read, the more I side with the bear thesis on this stock. I think that I’ll likely be proven wrong by the price movement – I assume it will continue to rise.

But for me, that’s not reason enough to buy.

In fact, I think continued SEC probes into accounting transparency will find something seriously amiss. Couple that with respected hedge fund managers outright claiming accounting fraud and investors might have enough fuel to stay away.  

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/a-bearish-narrative-on-alibaba-stock-based-on-realities/.

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