Despite the market for tech stocks booming in 2021, Alibaba (NASDAQ:BABA) stock collapsed. With the market now falling, Alibaba is rising again.
That might seem contradictory but a closer look helps make sense of it all.
China’s tech sector crackdown, which began in November 2020, crushed BABA stock in 2021. Shares are down 51% over the last year. Now indicators of a more business-friendly attitude, including an interest rate cut, have Alibaba up 7.7% so far in 2022.
Alibaba is one of my own big mistakes. I bought it soon after the crackdown and have since lost about one-third of my initial investment. Should I use its current strength to throw in my hand, or hang on?
The Business is Good
The strains of the stock aren’t reflected in the business.
In its September quarter report, Alibaba reported revenue of $31.1 billion, up 29% from the year prior. Operating income was up 10% at $2.3 billion. The company generated over $5.5 billion in operating cash flow.
Alibaba’s operations are now quite similar to those of Amazon (NASDAQ:AMZN). About 63% of revenue came from retail commerce within China. The largest portion is “customer management,” AKA marketing services on its Taobao and Tmall online stores. During the third quarter this segment grew just 3% year-over-year on a slowing economy and competition from companies like JD.Com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD).
There’s also a figure for “others,” which more than doubled to 27% of total revenue. This represents sales at Alibaba’s physical stores, like Tmall and Freshippo, where Alibaba takes inventory risk and thus sees lower margins. Alibaba also saw its cloud revenue grow 33%, to 10% of the overall business.
For the December quarter, with its November 11 “Singles Day” event on the books, analysts expect revenue of $40.71 billion and net income of $2.05/share. At its January 21 price of $129, the stock is selling for just 18.3 times earnings, very low for a tech stock.
Can We Trust BABA?
The problem for Alibaba is trust.
China’s government no longer trusts Alibaba and has spent the past year hammering that point home. This included a commitment by Alibaba to spend $15.5 billion over the next five years on “common prosperity,” which the government terms as fairness but critics call a shakedown.
A closer look from Nikkei Asia offers fodder for both supporters and critics. The money will go into areas that align with how Alibaba already does business, embedding its financial and health services deep into the countryside.
But that comes with more government control over Alibaba’s cloud operations. That’s a concern for the U.S. government, which has launched an investigation of Alibaba Cloud, fearing a potential threat to national security.
It’s ultimately U.S. investor distrust of China behind the stock’s recent fall. There are concerns it could be delisted by Nasdaq for refusing to let Americans audit its books, which is prohibited by Chinese law. A recent New Yorker profile of whistle blower lawyer Jordan Thomas casually mentioned a 2015 investigation into Alibaba’s accounting by one of his clients, on which no action has been taken.
The Bottom Line
If you think the East is red, don’t invest in Alibaba. If you see a Cold War here, avoid all Chinese stock.
I don’t see things that way. I see nothing in China’s tech crackdown beyond what domestic critics of the American Cloud Czars — Amazon, Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:FB), Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) — seek to do.
Alibaba is far more powerful within China than any of America’s Czars. The “common prosperity” money looks like profitable investment. Demands for digital giants to obey local laws are common in Europe. I suspect the government storm has mostly passed Alibaba by. The cyclone surrounding America’s “big tech” companies is just getting started.
On the date of publication, Dana Blankenhorn held long positions in AMZN, BABA, MSFT and AAPL. 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 Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.