When a stock gets cut in half in only 12 months, like we’ve seen with Alibaba Group (NYSE:BABA), the question that remains — is that a good thing or bad thing? Well if you don’t own BABA stock already but want to, it’s usually a positive as cheaper is usually better than more expensive.
The issues causing the decline appear to be mostly regulatory macro issues, as growth remains relatively strong at the company. The company posted core revenue growth of 22% for the quarter ending June 30.
The external issues are largely related to increased regulatory and business scrutiny by the Chinese government. Some attribute this to possible retribution for BABA founder Jack Ma’s negative comments toward the government.
Digging Into Macro Issues for BABA Stock
Some of the scrutiny started with the proposed ANT Group initial public offering (IPO). ANT Group, which is 33% owned by Alibaba, is a fintech and payments company which houses the Alipay app.
ANT was set to go public in April of this year but was pulled by Chinese regulators at the last minute. The Wall Street Journal said “the central-government investigation, which started early this year, focuses on regulators who greenlighted the initial public offering, local officials who advocated it and big state firms that stood to gain from it.”
Further confusing the ANT issue, in mid-September is was reported that Chinese regulators wanted to break up Alipay. A different platform for the app’s lending operations would be created under the plan. It was suspected that Ant could also be forced to hand over its user data to a new credit scoring firm, which would be partly owned by the Chinese government.
According to CNBC, regulators have introduced anti-monopoly legislation focused on the so-called “platform economy,” which refers to internet companies operating a variety of services from e-commerce to food delivery. Regulations have also aimed at bolstering critical data security and protection laws. Because of this, high-profile tech companies have faced investigations and punishments.
But it’s not just Chinese regulators, the chairman of the SEC Gary Gensler told Bloomberg that Chinese companies already listed on U.S. exchanges need to better inform investors about regulatory and political risks.
It seems like a perfect storm of negative stories. However it’s possible that these external factors won’t materially affect the underlying businesses of Alibaba.
Growth Metrics Appear to Remain Strong
Commerce revenue growth increased 35% in the most recent quarter. Total revenues grew 34%, but much of that was driven by acquisitions and consolidations — core revenue growth was up 22%. The cloud business showed impressive revenue growth increasing 29%, but only represents 8% of total company sales at this point. This was driven primarily by “robust growth in revenue from customers in the Internet, financial services and retail industries.”
Operating income (EBITA) declined 8% primarily due to strategic investment spending. This spending included areas such as logistics, digital media, cloud computing, local services and other innovation initiatives. The company broke out EBITA growth without these spending initiatives, which came out to a positive 6% in the commerce segment.
The cloud computing segment is not yet profitable, but approached breakeven status in the last quarter.
The company apparently believes its shares are undervalued as it bought back $3.7 billion in stock. This comprised 18.1 million ADS shares which is roughly equivalent to 144.5 million ordinary shares.
Valuation Looks Cheap
As of June 30, BABA had $72.9 billion in cash on the balance sheet, offset by only about $23 billion in total debt. Long-term investments are carried on the balance sheet at approximately $70 billion offering another source of both liquidity and potential asset growth.
Consensus EPS estimates for the FY ending March 2022 are $9.72 according to Yahoo Finance which give a current P/E of only 16x. However that EPS figure is likely understated because two of its segments, cloud computing and digital media/entertainment, are still not profitable. Those are dragging down overall company earnings.
Morgan Stanley provides a sum of the parts analysis which places the value of the commerce business alone at $189 based on their DCF calculation. They place the value of BABA’s equity investments and cloud business at $81. So essentially at todays stock price, an investor would be getting a fast growing cloud business and $70 billion in investments for free.
Putting aside the risk of an entire communist style takeover of the total Chinese private economy by the Chinese government, BABA stock looks like a strong buy here for long-term investors.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University. He also created the 406dad.com kids adventure blog.