I’ve made good money on Alibaba Group Holding (NASDAQ:BABA) stock.
These aren’t paper gains. They’re cash in my pocket since I recently sold out a position for a 21% profit.
Since I last sold, at $236 per share, BABA stock dropped to $205 but then recovered. Alibaba stock trades today at $215. At that price, you’re paying about 5.3x last year’s revenue of $112 billion (the yuan trades at 6.4 to the dollar). You’re also paying less than 26x earnings, in a world where big cloud companies trade much higher.
Anyway, Al Gore says it’s time to buy. Jim Cramer says it’s time to buy. Even Charlie Munger of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) says it’s time to buy.
What should you and I think?
The Dragon in the Room
The dragon in the room when you’re looking at Alibaba is China’s government.
Many conservatives love calling China “communist.” It’s more accurate to say China is a mandarin-driven autocracy, with President Xi Jinping in the role of both emperor and head mandarin.
Xi is what President Donald Trump dreamed of being. Xi says jump and even Alibaba co-founder Jack Ma asks how high. Americans write breathlessly about Ma “being cut down to size.”
But there’s little China’s government is demanding that America’s own governing class doesn’t want from Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Facebook (NASDAQ:FB), Twitter (NASDAQ:TWTR) or SoFi (NASDAQ:SOFI). They want transparency. They want fair treatment of workers and data. There’s a special urgency because China’s online economy is a bigger portion of the whole than even ours. Tech regulation is economic regulation.
The question is how much will this cost China’s cloud stocks such as Alibaba, Tencent Holding (OTCMKTS:TCEHY), JD.com (NASDAQ:JD) and Baidu (NASDAQ:BIDU).
The Alibaba Growth Story
Despite the “crackdown,” Alibaba is growing faster than ever. Revenue grew 40% in fiscal 2021 compared with 2020. Despite its woes Alibaba brought about 20% of that to the net income line. Unlike Amazon (NASDAQ:AMZN), Alibaba’s online store takes no inventory risks. It also brings merchants’ entire operations online, offering cloud applications as well as a cloud platform.
It was Alibaba’s efforts to deal with money as it deals with goods, in the form of subsidiary Ant Financial, that got it in trouble. Ant was making loans then selling off nearly all the risk. That won’t be allowed now, which reduces Ant’s risk to the financial system. But it cost Alibaba shareholders the potential for hundreds of billions in gains.
Still, add in the digital yuan and Alibaba could quickly do what Facebook only dreams of doing with its diem cybercurrency. That is, eliminate settlement costs in transactions by moving the money instantly, doing away with settlement.
Alibaba cloud’s moves to export its services face the same risk, namely distrust of Xi’s government, that Twitter does in Nigeria or India. But Alibaba’s cloud is continuing to take market share, passing IBM (NYSE:IBM) to take fourth behind only Amazon, Microsoft (NASDAQ:MSFT) and Google. It’s continuing to innovate and it’s not losing money, either. Can Google Cloud say the same? (Uh, no.)
The Bottom Line
If you think Xi Jinping is a Communist, don’t even think about buying BABA stock.
If you think he’s no different than Trump, India’s Prime Minister Narendra Modi, or even Nigeria’s President Muhammandu Buhari, I see no reason to hold back.
No other cloud stock is priced at just 5.3x revenue or 26x earnings. It’s not even close. Alibaba has also been through the government mill and survived.
I’ll be getting back in shortly.
On the date of publication, Dana Blankenhorn held LONG positions in MSFT, AMZN, JD, FB and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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 danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
