Look Past the Meddling, It Makes No Sense for China To Keep Alibaba Down

Recently, after touting shares in Alibaba Group Holding (NASDAQ:BABA), I took my own advice and bought some BABA stock.

The Alibaba (BABA) logo featured outside of an office building with bushes in the background
Source: zhu difeng / Shutterstock.com

When writing a second story on the company last week I disclosed the holding.

I’m underwater on the investment.

That’s the difference between trading, speculating and investing. I made my call based on the long-term prospects of the company. I didn’t make it based on the politics of the moment, or the momentum, or the charts.

I think it will come good.

BABA Stock: Cheap as Chips

Right now, Alibaba is the cheapest big cloud company you can buy. The price-to-earnings ratio is 24. The BABA stock price-to-sales ratio is under 5.

Alibaba is the largest of China’s “Cloud Emperors.” It has invested billions of dollars and built a network of data centers that reach around the world. The five American companies that have done this are worth a combined $8 trillion dollars. Alibaba is worth $545 billion.

Of all the Emperors, Alibaba is the most active in selling its capacity. It offers a complete software stack. In addition to being the Amazon.com (NASDAQ:AMZN) of China, it’s the Microsoft (NASDAQ:MSFT). Since its software mainly covers accounting and business operations, it’s also the Intuit (NASDAQ:INTU).

That’s a powerful position. China’s government can assail it. Beijing’s bureaucrats can regulate it. Unlike American policymakers, who still give our Cloud Czars carte blanche, China is doing both.

But nationalizing the Alibaba cloud would crush the Chinese stock market. It would crush the country’s burgeoning middle class. It is the middle class, not some non-existent peasant in Chairman Mao apparel, on which the Chinese “Communist” Party depends for legitimacy today.

You won’t hear this from an American foreign policy “hawk.” You won’t hear it from a Chinese one. Talk instead is all about a new “Cold War.”

That’s not happening. Neither side can afford it. Here is some evidence from China. Here is some evidence from America.

Both sides have met the enemy. He is us. A Cold War would boil the seas and end human existence. No one would win.

What’s Really Going On

China is regulating its internet sector in the public interest. Alibaba holds far more power over China’s economy and media than Amazon or Facebook (NASDAQ:FB) ever dreamt of. China’s Ant Group was guaranteeing loans without taking on financial risk, like American International Group (NYSE:AIG) in the 2000s. It was forcing merchants to sign exclusivity agreements beyond the American imagination. Costco Wholesale (NASDAQ:COST) may demand your lowest price, but they won’t keep your goods out of Walmart (NYSE:WMT).

The government regulation is designed to open the Chinese market, to give other companies a chance. Not just Pinduoduo (NASDAQ:PDD) and JD.com (NASDAQ:JD), but start-ups as well.

Analysts say the most recent quarterly report looked bad, but was it? Alibaba’s revenue grew in the June quarter at a 22% rate. That’s close to the Amazon rate of 27%. The company’s retail operations grew at a 14% rate. Amazon’s product revenue grew 16%. Cloud revenues were up 29%. Amazon’s AWS revenue grew 39%.

Alibaba profits totaled $7 billion. That’s up 50% from a year ago. Revenue was $31.83 billion without any special promotions. That’s after the antitrust push, something that’s still in Amazon’s future. Amazon has a PE of 58x.

The Bottom Line

China has done what America and Europe are just starting to do. It has created an antitrust policy on behalf of middle class workers, shoppers and investors.

The result will be a healthier consumer tech sector. But it won’t be the collapse of Alibaba.

If an American cloud company growing at 22% and reporting over 20% of revenue as net income, sold at 25 times earnings, it would be a bargain. Don’t let your politics get in the way of making money.

On the date of publication, Dana Blankenhorn held long positions in AMZN, BABA, FB, MSFT and JD. 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 danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

Article printed from InvestorPlace Media, https://investorplace.com/2021/08/look-past-the-meddling-it-makes-no-sense-for-china-to-keep-alibaba-down/.

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