China’s antirust regulators recently concluded their investigation against Alibaba (NYSE:BABA), imposing a record fine of $2.78 billion. However, BABA stock rallied after investors digested the news.
True, the fine is massive, but it’s also only equivalent to a small fraction of Alibaba’s revenues and only about 4% of its domestic annual sales according to The Wall Street Journal. Moreover, it is significantly less than what tech giants like Facebook (NASDAQ:FB) have had to pay recently. Therefore, with the loosening regulatory grip on BABA, investors can now focus on the company’s stellar fundamentals and outlook.
After losing some $80 billion of its value when the news initially broke, BABA stock has since recovered a chunk of those losses and is looking to a brighter future in 2021. Analysts expect revenues to rise by 31% on a year-over-year (YOY) basis in fiscal 2022. Moreover, average consensus estimates suggest that the stock is undervalued by some 34%, using today’s price of around $232.
So, with plenty of growth runway, I expect this stock to continue climbing higher amidst the recent breakthrough.
BABA Stock and the End of the Antitrust Investigation
After months of speculation, the antitrust investigation against Alibaba has finally drawn to a close with a record fine. However, investors in BABA stock expected worse and feel that the company has gotten out of this predicament relatively unscathed.
Of course, it is important to note that those siding with the company in the investigation were proved wrong. The documentation supporting the penalty decision shows that the regulatory crackdown was valid. Moreover, Alibaba has accepted the penalty and states that it will make sure to better carry out its responsibilities.
In addition to the fine, the company has lost out on its ability to strike exclusive contracts with major brands. However, that mainly impacts its business-to-consumer (B2C) transactions and won’t impact the medium and small-sized enterprises listed on its platforms. Additionally, its relationship with third-party sellers won’t change much. Therefore, it would surprise me if merchants look to platforms other than Alibaba’s Tmall and Taobao anytime soon.
Lastly, a major relief for the company is the lack of stringency regarding the divestment of non-core assets. And even if there are a sizeable number of divestments, it will indirectly benefit the company in streamlining the business.
China’s Economic Recovery
Perhaps the most encouraging aspect behind BABA stock now, however, is the faster-than-expected domestic economic recovery experienced by China.
For example, the country posted 18.3% growth in the first quarter, spurred by more robust consumption and government support for smaller firms. That was up significantly from the 6.5% growth it posted in Q4. Moreover, retail sales in March increased 34.2% YOY, “beating a 28.0% gain expected by analysts” according to Reuters.
This economic rebound has been led by factories that had to rush to fill overseas orders as well as cater to domestic demand. Now, China is expected to grow at an impressive 8.6% this year, nicely ahead of the government’s 6% target. Reuters also noted that “[w]ith the economy back on a more solid footing, China’s central bank is turning its focus to cooling credit growth to help contain financial risks.”
Such strong economic recovery numbers are likely to provide a more conducive business environment for Alibaba and other Chinese companies.
Final Word on BABA Stock
Despite the fine, BABA stock investors should be relieved by the results of the antitrust investigation against the company. Things could’ve been significantly worse. Basically, Alibaba has dodged a bullet here.
Now, the spotlight is on the company’s glowing fundamentals and strong outlook. Moreover, with the Chinese economy growing at a brisk pace again, Alibaba will likely benefit.
All that in mind, now is the time to jump back on the BABA stock train.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
