Alibaba Group Holding (NYSE:BABA) is being crushed by politics, on both sides of the Pacific. Regulatory woes domestically and internationally are eating into BABA stock, toppling a company with otherwise fantastic valuation.
China’s leading Cloud Emperor is down nearly 30% so far in 2021. All the technical signs are bearish. Chinese President Xi Jinping has hit the company with harsh regulations.
The crackdown on Chinese tech companies by the government has some investors considering Chinese investing as a whole. Alibaba doubly bruised not only regulations, but the bearish tailwinds from the onslaught.
Alibaba is either dirt cheap or a value trap.
BABA Stock Is Dirt Cheap
Al Gore’s investment firm hasn’t given up on Alibaba.
The company’s numbers back him up. During its fiscal fourth quarter, ending in June, Alibaba earned almost $7 billion, $2.54 per share, on revenue of $31.9 billion. Earnings were down 8% on the crackdown, but revenue rose 34%.
Since the numbers came out, Alibaba shares are down 16%, dropping the market cap to $463 billion. The trailing price-to-earnings (P/E) ratio is down to 20, far lower than comparable U.S. tech stocks. Even International Business Machines (NYSE:IBM) trades at a P/E of 23.5.
Alibaba next expects to report Nov. 2. Analysts expect earnings of $1.72/share on revenue of $32.8 billion.
There’s no doubt the company’s business and business prospects have been hurt by the new regulatory wave. What no one asks is whether the crackdown is justified, or whether the company can succeed in the new environment.
The latest Gartner (NYSE:IT) report on cloud labels Alibaba Cloud a “visionary,” a good fit for customers based throughout Southeast Asia. Unlike America’s clouds, Alibaba Cloud offers a full application suite, from databases to payments. For many Chinese companies, Alibaba is their only technology vendor.
A Value Trap
The bear case is built around President Xi Jinping, who western observers describe as an autocrat driving Alibaba down because he’s jealous of its power. There’s no thought to whether charges against former CEO Jack Ma might have some evidence behind them.
There’s no thought to whether cracking down on the “996” work culture (people working 54 hours every week) might be popular. No thought is given to whether Ant Financial was offloading too much risk, carrying just 3% of its heavily-marketed loans. No one asks whether ending “exclusivity,” under which Alibaba merchants couldn’t sell to JD or Pinduoduo, might be fair competitive practice.
Xi’s moves to investigate crime, strengthen antitrust and make companies “give back” to society look more like a Democratic Party wish list than a Communist Manifesto.
That hasn’t stopped the critics, even a Wall Street Journal rehabilitated George Soros, from calling Xi a Mao-style Communist surrounded by yes-men. It fits the narrative, so Soros is just a businessman now.
The Bottom Line
Neither America nor China can afford another Cold War.
China needs investment, and it needs to reward domestic investors. Despite its investment in renewable energy, China’s air and water remain much dirtier than America’s. We only have one planet.
It’s rewarding for politicians to dump on China, ignoring the fact that America’s military just occupied one of China’s neighbors for 20 years. It’s fun to call Xi a communist and ignore creeping fascism at home.
But any leader can be feel the heat if they go too far. If the crackdown against China’s “big tech” threatens the economy or if it loses popular support, policies will change. Even in the present environment, Alibaba continues to grow, and continues to profit.
If you want to make money, you buy stocks when they’re out of favor, and sell when they’re overly loved. You ignore politics and look for profit.
On the date of publication, Dana Blankenhorn held a long position in BABA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.