Chinese e-commerce and tech giant Alibaba (NYSE:BABA) stock has been on a steep decline since November. After having hit a record high of $319.32 in late October 2020, the shares have taken a hit since then.
BABA stock recently saw a 52-week low of $179.67. It is currently at $195. Understandably, the market wonders whether the wild ride will end soon.
Regular InvestorPlace readers are familiar with Alibaba’s various offerings that extend from being the largest e-commerce group in China to its high-growth cloud, digital media and entertainment businesses. Yet, so far this year, BABA shares are down 16%. By comparison, this is how several other China-based leading stocks and exchange-traded funds (ETFs) have fared:
- Baidu (NASDAQ:BIDU) — down 24% year-to-date.
- KraneShares CSI China Internet ETF (NYSEARCA:KWEB) — down 33%.
- New Oriental Education & Technology (NYSE:EDU) — down 88%.
- TAL Education (NYSE:TAL) — down 91%.
- Tencent (OTCMKTS:TCEHY) — down 16%.
Put another way, all these Chinese names are either flirting with or already are in bear market territory. So, the drop has not been limited to BABA stock. Current price levels could be tempting for bullish investors. However, I think BABA will not likely start a new uptrend any time soon.
Therefore, investors with a long-term portfolio could keep the stock on their radar and start a position around $185, or even below.
The Recent Decline In BABA Stock
As one of the most innovative Chinese enterprises, Alibaba is widely followed by investors worldwide. Its founder Jack Ma, who has at times been critical of various Chinese regulations, is credited with the staggering success of the company.
Yet moves by Chinese authorities in late 2020 became a game changer for Alibaba and, in fact, many Chinese businesses with high growth potential. Let’s quickly remember the case of fintech leader Ant Group, an Alibaba affiliate. It owns Alipay, the largest digital payment group.
In late 2020, Ant Group was expected to make its stock market debut in an initial public offering that would be worth around $35 billion. However, Chinese authorities halted the IPO, sending a clear message to tech heavyweights and their leaders like Ma. It has been reported that Ant Group is becoming a financial holding company whose actions will be under the scrutiny of the state-controlled central bank.
Meanwhile, Alibaba received an 18 billion RMB (or $2.8 billion) anti-monopoly fine from the State Administration for Market Regulation (SAMR). Recent weeks have seen further regulatory pressure on the “platform economy.”
For instance, the ride-hailing giant Didi Global (NASDAQ:DIDI), which went public in June, is being investigated by the Chinese cyberspace regulator. Finally, in the past several days, online education groups, such as TAL Education and New Oriental Education & Technology, have also come under review.
As authorities tighten their control of large enterprises in China, the impact is also felt in global markets. For instance, Cathie Wood’s Ark Invest has been selling all of its Chinese holdings in its funds. Therefore, it might be still early to bottom fish for Chinese shares, including BABA stock.
Alibaba Earnings
Founded in 1999, Alibaba reached 1.13 billion annual active consumers as of March 31. The gross merchandise volume (GMV) in Alibaba Ecosystem was 8,119 billion RMB (or $1,239 billion) for fiscal year 2021.
In mid-May, Alibaba released financial results for March quarter and full fiscal year 2021. Revenue for the quarter was 187.4 billion RMB (or $28.6 billion), up 64% year-over-year. The increase was mainly driven by robust revenue growth of its China ecommerce retail business, as well as Cainiao logistics services and the cloud computing business.
Non-GAAP diluted earnings per American Depositary Share (ADS) for the quarter was 10.32 RMB (or $1.58) implying a year-over-year increase of 12%. BABA now expects to generate revenue of over 930 billion RMB in fiscal year 2022. By comparison its 2021 top line was 717.3 billion RMB (or $109.5 billion).
“We remain very excited about the growth of China’s consumption economy, which is benefiting from the acceleration of digitalization in all aspects of life and work,” CEO Daniel Zhang said. “We will continue to focus on customer experience and value creation through innovation, as we pursue our mission to make it easy to do business anywhere in the digital era.”
Alibaba will report first quarter FY22 results in the coming days. BABA shares are currently trading at 20.33x consensus forward price-earnings (P/E) and 4.77x sales. The stock might look undervalued when compared to its U.S.-based e-commerce and cloud rivals such as Amazon(NASDAQ:AMZN) or Alphabet (NASDAQ:GOOGL), (NASDAQ:GOOG). Yet, given the uncertainty over the extent of regulatory moves in China, it is possibly too soon to start a new position in BABA shares.
The Bottom Line on BABA Stock
Over the past year, Chinese authorities have been expanding their antitrust, financial, and cybersecurity laws, targeting large domestic names well-known for their technology platforms. As question marks still persist on how and when the crackdown might end, it could still be somewhat early to buy BABA stock.
However, a further decline toward the $185 level or below would improve the margin of safety. In the coming weeks, I’d expect the shares to trade in a range between $180 and $200.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
