Remember the good old days of 2014 when the initial public offering (IPO) of Alibaba (NYSE:BABA) produced a darling of the markets? That was a very different time, and today there are some frustrated BABA stock holders.
It hasn’t always been easy to stay the course with Alibaba. Many traders have had to learn the hard way that investing in Chinese businesses isn’t the same as owning American stocks.
That’s because the Chinese government, in some ways, has an iron grip on the nation’s businesses. If you’re going to own BABA stock, you’ll definitely need to accept this and get used to it.
However, if you’re willing to keep tabs on China’s tough regulatory policy enforcement – and if you continue to see value in the company that Jack Ma co-founded – then your investment in Alibaba might be worth holding on to.
A Closer Look at BABA Stock
Admittedly, long-term BABA stock investors had to endure some lengthy, lackluster stretches of time.
I’m specifically thinking of 2015 to 2016, and then again from mid-2018 to mid-2019, when the stock just went nowhere.
But then, there were the times when the stock rallied sharply, rewarding patient investors. A case in point would be the rebound starting in March 2020. That run-up took the Alibaba share price from $180 to a 52-week high of $319.32 in October.
Unfortunately, the run-up couldn’t last forever and BABA stock retreated in November and December. And so far in 2021, the buyers can’t seem to generate much enthusiasm.
The stock recently was trading around $234, which is neither very high nor very low on a historic basis.
One thing that’s working in the investors’ favor is the stock’s seemingly reasonable valuation. On a trailing 12-month basis, Alibaba has a price-to-earnings ratio of 26.08.
In other words, BABA stock might not be running at full steam yet, but it should appeal to bargain hunters.
Long Arm of the Law
Trying to fight the government – any government – is a tough battle to win. In China, it’s probably impossible.
Ma found this out the hard way in late 2020. While Chinese fintech firm Ant Group (which was founded by Ma) was preparing its IPO, Ma said that in China, banks still operate with a strong “pawnshop” mentality. (These are largely state-owned banks, by the way.)
It’s not entirely clear whether that comment and/or other verbal barbs led to Ma’s disappearance for several months. Thankfully, he reappeared in January of 2021, evidently alive and healthy.
Yet, the damage had already been done. Chinese authorities had pulled the plug on the Ant Group IPO in his absence, while reports surfaced of a sweeping anti-monopoly probe in China, with Alibaba being a potential target.
Evidently, it’s all part of a broader governmental push to regulate China’s technology giants. And of course, few if any Chinese giants are a bigger target than Alibaba.
This Fine Is Just Fine
Much of the uninspiring price action in BABA stock can probably be attributed to the market holding its breath and waiting for the Chinese government to take action against Alibaba.
After all, if there’s one thing that the market can’t stand, it’s uncertainty.
I’m glad to report, however, that the uncertainty has cleared as Chinese authorities finally decided how to punish Alibaba.
Make no mistake – they definitely made an example of Alibaba. Specifically, the regulators hit Alibaba with a $2.8 billion fine.
And with that, Alibaba pledged to “to better carry out its social responsibilities.”
Along with the fine having been imposed, as InvestorPlace contributor Muslim Farooque points out, Alibaba has lost its ability to strike exclusive contracts with major brands.
Of course, none of this will pose any major threat to Alibaba. Millions of shoppers will continue to use its platform, and Alibaba will continue to generate ungodly amounts of money.
The Bottom Line
Maybe $2.8 billion was a slap on the wrist, or maybe it wasn’t. I’ll leave that debate to the social media pundits.
As for BABA stock, I feel it’s best to remember that the market has short-term memory loss, and a short attention span.
And so, the memory of this strange episode will pass and in time – probably sooner rather than later – the market will learn to love Alibaba once again.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
