Alibaba (NYSE:BABA) is amid a significant transition. The company is selling certain stock positions and had planned an initial public offering didn’t work out. Ultimately, the risk-to-reward ratio for Alibaba stock is not favorable, so investors should look for better opportunities.
Amid a “subpar” Chinese economic recovery, investors need to be extra-selective. The price is currently well below its highs, which may attract bargain hunters. Still, a low share price does mean a good value, and investors should be cautious because of the red flags surrounding BABA.
Why Is Alibaba Stock Down?
The downturn in Alibaba stock can’t just be attributed to China’s “subpar” economic recovery. Alibaba’s financials are certainly imperfect – but we’ll get to that topic in a moment.
If you’re looking for signs of trouble with Alibaba, they’re not difficult to find. For one thing, Alibaba dumped large quantities of two significant stock holdings.
First, as Bloomberg reported, Alibaba “sold almost $360 million of stock in Chinese streaming platform” Bilibili (NASDAQ:BILI) “at a significant discount.”
Investors may question if this is a case of panic-selling to generate funds urgently.
Alibaba sold around 33 million shares of electric vehicle manufacturer XPeng (NYSE:XPEV). This may be part of Alibaba’s restructuring, but then, it might also be another investment that didn’t work out as planned.
Speaking of ideas that didn’t work out as planned, Alibaba recently canceled the IPO of its logistics division, Cainiao.
This was a highly anticipated IPO that would have represented a “$1 billion-plus deal,” Bloomberg reported. So again, we’re detecting evidence that Alibaba’s restructuring efforts aren’t going smoothly.
Alibaba’s Disconcerting Financial Results
Since BABA stock is down, Alibaba’s depressed valuation makes sense. To quantify this, we can observe that Alibaba’s GAAP trailing 12-month price-to-earnings ratio looks fairly low, at 13.25x.
Yet, we encourage you to conduct your full due diligence on Alibaba. A low P/E ratio can sometimes lure investors into a value trap. We’ve already mentioned some of the red flags for Alibaba, so perhaps the shares are “cheap for a reason,” as they say.
Here are some more unfavorable facts to take note of. Even amid an uneven Chinese economic recovery, it’s alarming that Alibaba’s fourth-quarter 2023 net income plummeted 77% year over year. Moreover, the company’s income from operations declined 36% YOY.
One might also raise concerns about Alibaba’s capital position. Alarmingly, the company’s free cash flow decreased by 31% YOY in Q4 of 2023.
Plus, Alibaba’s net cash provided by operating activities dwindled by 26%. The point is, don’t just focus on Alibaba’s share price or P/E ratio when deciding whether the stock is a bargain or not.
Alibaba Stock: Watch Out and Protect Your Wealth
Many investors have learned hard lessons about buying share-price dips in troubled companies. Wealth protection should be a high priority, and the last thing you need is to get caught in a value trap with Alibaba stock.
There are signs that Alibaba’s restructuring strategy isn’t working out as intended. Also, investors might wonder why Alibaba is selling large share position in Bilibili and XPeng.
Finally, Alibaba’s financial facts don’t point to a stable, flourishing business. With all of that in mind, it’s wise to steer clear of Alibaba stock in 2024.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
