For quite some time, I’ve been bullish on the prospects for Alibaba (NYSE:BABA) stock. But lately, there have been some ominous regulatory developments, which could make it tougher for the growth story.
Now this is not to imply that there is an existential threat to Alibaba. The company definitely has a strong competitive position in the Chinese market. It is also encouraging that the country’s economy has proven to be resilient with the impact of the Covid-19 pandemic.
Just look at Singles Day, which is a 24-hour festival for shopping. It was off-the-charts successful, with gross merchandise volume at a staggering $74.1 billion. This will dwarf Black Friday, Cyber Monday and Amazon’s (NASDAQ:AMZN) Prime day.
As for the biggest beneficiary of Singles Day? Of course, it’s Alibaba. Note that the company operates the massive e-commerce platforms of Tmall and Taobao. These retail marketplaces have 881 million mobile MAUs (Monthly Active Users).
But Alibaba stock is more than just about e-commerce. The company also has a thriving cloud computing business, which reported 60% year-over-year growth in the latest quarter to $2.2 billion. Then there is the Digital Media and Entertainment business. A key driver for this is the Youku video platform. In the quarter, there was a 45% increase in the average daily subscriber base.
As a result, Alibaba has continued to grow at a fast clip. Revenues in the third quarter jumped by 30% to $22.8 billion and the adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) rose by 28% to $7 billion.
Great, right? Definitely. But again, there are some danger signs. And we got just the start of all this with the failed Ant Group IPO.
Background On the Deal
Ant Group started as an escrow system in 2004 and was a part of Alibaba. The person who lead the creation of this division was Jack Ma, who was the CEO at the time and the co-founder of Alibaba. His vision was for Ant to completely transform the financial services industry in China.
Over the years, he added a myriad of offerings like micro loans, money market funds, savings accounts, insurance policies, credit scoring and so on. He also developed a mobile payments system called Alipay. An essential part of the success for this was the use of QR (quick-response) codes for scanning transactions.
The strategy was certainly spot-on and there was considerable synergy with Alibaba, which helped supercharge the distribution. As a result, Ant Group has become a financial powerhouse in China. For example, the company’s platform manages more annual transactions than Mastercard (NYSE:MA) and Visa (NYSE:V). Alipay also has 711 million MAUs.
So when Ant Group was ready for an IPO, it was poised to be the biggest offering ever. The estimate was that the company would raise over $34 billion.
Growing Power Of Ant Group
But a few days before the deal was supposed to hit the markets, the Chinese government intervened. There were fears of the anticompetitive behavior from Ant Group. As a sign of the level of seriousness of this move, Chinese President Xi Jinping was the person who made the ultimate decision, according to a report in the Wall Street Journal.
Note that there had been long-running concerns about the growing power of Ant Group. There were also worries about the risks that the company was taking on to keep up the growth. So might this lead to a “subprime” implosion similar to what happened in the U.S. during the financial crisis? Perhaps so. Simply put, the Chinese government did not want to be left holding the bag.
However, what appears to have been the breaking point for Xi was when Ma recently made controversial statements at a recent conference. He criticized the Chinese government and talked about how the traditional financial services industry was poised for disruption.
Bottom Line On Alibaba Stock
The Chinese government has quickly instituted various regulations for anticompetition. And these are likely to weigh on the performance of Ant, which Alibaba has a 33% equity stake.
But the rules may be just the beginning. The Chinese government could be in the process of taking a more adversarial stance against big tech – and this would definitely be a big threat to Alibaba stock. Thus, given all this, investors should be very cautious right now. There could be considerable headline risk in the coming months.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.