Alibaba Group (NASDAQ:BABA), the leading Chinese cloud stock, is not going out of business. You’re not about to be prohibited from owning BABA stock.
But that’s not the way it’s trading. Shares hit a short-term bottom of $186 on July 27 but have since bounced back to $195. That’s a market cap of $530 billion, but a price to earnings (P/E) ratio of 23. It’s just over 5x last year’s sales of $111 billion, based on the current exchange rate of 6.46 yuan to the dollar.
By way of comparison Facebook (NASDAQ:FB) is worth $1.06 trillion with a P/E of 32. It is selling at over 10x this year’s expected $94 billion in sales.
Something is out of whack. That something is politics.
Over the last year, China’s government has done what American trustbusters only dream of.
Their system is to give business its head, then restrain market leaders by quickly punishing them for past actions. In the American system companies are punished slowly, when old laws are reinterpreted or new laws are passed.
If Mao Zedong were alive, he’d be rolling around in his grave at China’s prosperity, its fierce competition and its lack of regard for the poor. Xi Jinping has recreated the Imperial mandarin system. He could be overthrown, based on poor performance. But performance is fine, a growth rate of 7.9% year-over-year in the second quarter.
What’s different is the dominance Alibaba and the major Chinese tech companies like Baidu (NASDAQ:BIDU), JD.com (NASDAQ:JD), and Tencent Holding (OTCMKTS:TCEHY), have over the economy. China’s consumer society has grown up around Alibaba’s mobile-first technology. It’s as if Walmart (NYSE:WMT) never existed.
Americans Get Out
American conservatives and Chinese “communists” both want American investors to leave. China wants local investors to get in on the action. The recent fall in prices is their opportunity. American conservatives want a new Cold War. Decoupling the two economies is essential to that project.
In China, the iShares MSCI ETF (NYSEARCA:MCHI) is down 30% from February. Didi Global (NASDAQ:DIDI) shares collapsed after their IPO. This drew the ire of TV analyst Jim Cramer, who had recommended them.
The threat that BABA stock could be de-listed from American exchanges, which the Biden administration is maintaining, is potent. That’s because China still needs foreign investment to grow, although its leaders don’t want to admit it. Without foreign investment new companies will have a harder time challenging Alibaba.
The Bottom Line on BABA Stock
Chinese regulators are already signaling that they’ve gone far enough for now. Some American hedge funds are already getting back in. Recent sales by ARK Innovation (NYSEARCA:ARKK) probably represent a bottom.
Alibaba CEO Daniel Zhang has said his company will be “more thoughtful.” But it still has the market advantages it had before the crackdown. Co-founder Joseph Tsai still owns the Brooklyn Nets. Warnings that American money is about to be kicked out of China, and that BABA stock may quickly fall to $152, look overblown.
How would you like it if American investors were kept out of Amazon (NASDAQ:AMZN) or Facebook? That’s what has happened to China and BABA stock. The balance is being redressed. But you can still profit from it. That’s assuming you can still breathe, and that the Chinese can swim.
On the date of publication, Dana Blankenhorn held long positions in BABA, JD, FB and AMZN. 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 Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.