Alibaba Group Holding (NYSE:BABA) has been hit by a massive $2.8 billion fine for violating China’s opaque antitrust rules. How did BABA stock react?
Alibaba was due to open for trade April 12 at about $237 a share. That’s a market cap of $608 billion for a company with expected 2021 sales of about $98 billion, of which almost 25% is expected to be net income.
Compared to American cloud czars that’s dirt cheap. The closest comparison is Facebook (NASDAQ:FB), worth $890 billion on 2020 revenue of $86 billion, of which $29 billion or 34% was net income.
Why is BABA Stock So Cheap?
Tensions between the U.S. and China have made BABA stock, along with the shares of China’s other cloud emperors, relatively cheap over the last year.
The Trump Administration threatened to de-list Chinese companies for failing to let Americans audit them. Documents will have to be submitted proving companies like Alibaba aren’t under government control. Officers who are also Chinese party officials will have to be named.
But the Securities and Exchange Commission (SEC) has just started its rule-making process. Implementation would only come three years after regulations are drafted. There’s plenty of time for the threat to be defused, although some analysts insist delisting is inevitable.
Even delisting wouldn’t be fatal for Alibaba investors. BABA stock has been trading in Hong Kong since last year. Tencent Holdings (OTCMKTS:TCEHY), its main cloud rival, has never had a direct U.S. listing. The trading environment is changing so rapidly that, even after delisting occurs, it could be irrelevant.
Still, Alibaba stock peaked last October at nearly $310 and now trades about 30% below that high. The shares were hit by the cancellation Ant Financial’s public offering, of which it owns about one-third, last year. Such an offering is still coming, but in the form of a financial holding company.
Why is Regulation So Harsh?
While the government’s actions appear harsh, they’re not confiscatory. If applied to U.S. companies, they might even be welcomed.
At issue is Alibaba’s policy of requiring merchants to trade exclusively through its platform, and not to trade through rivals. There’s no such rule in the U.S. Many third-party merchants sell through both Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT).
In the case of Ant, the company was making loans and re-selling them, taking almost no risk. That’s the kind of thing that helped cause the 2008 market crash, where dodgy mortgages were marketed as “AAA” bonds through insurance that couldn’t pay off.
China’s actions also have yet to reduce Alibaba’s free cash flow, about $19.4 billion last year. (The reported figures are in Hong Kong dollars that trade at 7.78 to the U.S. currency. The Chinese yuan currently trades at about 6.5 to the dollar.)
Facebook, by comparison, had $23.6 billion in free cash flow last year. Alibaba dramatically reduced its capital spending last year, while Facebook spent $15 billion, about the same as in 2019. That’s what should worry Alibaba investors most.
The Bottom Line
China’s government can’t afford to be too harsh on Alibaba, or its other cloud emperors. That would inhibit their international growth. Alibaba, the largest of the group, only recently passed International Business Machines (NYSE:IBM) in cloud market share, according to Synergy Research.
Given that Alibaba is offering complete application suites, not just a platform, its cloud share may be overestimated. Having merchants on its cloud may be more effective in tying them to it than any explicit marketing policy.
In short, Alibaba isn’t threatened by the actions of either the Chinese or U.S. governments. China’s actions put Alibaba more in line with American norms. There is plenty of time for the new Administration and China to come to an understanding on policy.
It’s still a buy.
At the time of publication, Dana Blankenhorn directly owned shares in BABA, FB, and AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.