It seems like investors always have a good reason to sell Alibaba (NYSE:BABA) stock. They’ve seemingly been given another one as of late.
Last month, the initial public offering (IPO) of Ant Financial, a payments platform of which Alibaba owns one-third, was suspended. It was the Chinese government that stepped in, reportedly because Ant was providing an alternative to state-owned banks.
BABA stock fell 8% on the news. It’s now down 15% from where it traded the day before the Ant Financial news broke.
I’m not going to pretend like the pulled IPO doesn’t matter. It does. But it also doesn’t matter enough to justify a 15% decline in the span of five weeks.
Meanwhile, we’ve been here before. Investors find something wrong with BABA stock — and ignore all that’s right with it. The negative news fades, the market comes to its senses and BABA resumes its rally.
I don’t expect this time will be any different. Simply put, this is one of the world’s best businesses. Any time investors can get a discount for buying that business, they should grab it with both hands.
The Ant IPO and BABA Stock
Again, the IPO move does have an impact. I wrote in July that the offering would be “a positive catalyst” for Alibaba stock.
But I also wrote, at the same time, that “there are other reasons to consider a long position too.” In other words, the case for BABA stock didn’t rest on the Ant Financial IPO. It still doesn’t.
After all, Alibaba only owns one-third of a company whose IPO price was to value the company at about $310 billion. In other words, Alibaba’s stake would be worth about $103 billion, and presumably more, assuming, as was likely, Ant stock saw a post-IPO “pop.”
Here’s the thing, though: Alibaba’s market capitalization since the day before the IPO suspension has declined by about $125 billion. In other words, the market has reacted almost as if Alibaba’s stake in Ant has disappeared, instead of Ant’s IPO simply being suspended. Yet Alibaba still owns the stake, Ant remains profitable and the value in the business still exists, whether it’s private or public.
To be fair, it’s not quite that simple. There’s been other news surrounding BABA stock over the past five weeks.
On Nov. 5, Alibaba delivered fiscal second-quarter earnings. As has happened often, investors shrugged at another blowout quarter, in which Alibaba grew revenue 30% and topped Wall Street profit expectations. From here, it looks like another step in a literally unprecedented growth story.
The following week, more political drama arrived. Antitrust guidelines from the Chinese central government sent BABA and other Chinese tech stocks plunging.
Between the IPO suspension and the proposed antitrust rules, there is a case that political risk is rising, which in turn might suggest a lower valuation for Alibaba stock. But let’s take a step back.
Big companies are going to face regulatory scrutiny. We’ve seen it for years in the U.S. It’s the nature of being that big (and in Alibaba’s case, that good), because being big is, well, a big advantage.
But do we really think that the Chinese central government is going to stand that firmly in Alibaba’s way? Alibaba is a national champion. It’s a key part of the Belt and Road Initiative, part of China’s plan to combat Western dominance. And if the central government was really that worried about antitrust issues, surely it would have stepped in years ago.
Chinese politics often are a mystery to even seasoned observers. I think it’s safe to say, however, that the country hasn’t grown the way it has for three decades by shooting itself in the proverbial foot.
We’ve Been Here Before
Any sort of crippling sanction on Alibaba would be exactly that. Meanwhile, it already seems likely that the Ant Financial IPO will happen at some point.
And, in the meantime, Alibaba marches on. Revenue growth remains spectacular, and margins are healthy. Its cloud business is the runaway leader not just in China, but across Asia. Its B2B (business-to-business) offering is massively underappreciated.
Again, from time to time, investors forget about all of those positive attributes, plus a bizarrely cheap valuation (just 21x forward earnings at this point). They worry about the company’s VIE (variable interest entity) structure or the so-called “trade war” or accounting fraud elsewhere in the country and dump BABA stock. They eventually regret it: even with this pullback, Alibaba stock has nearly quadrupled since its own IPO back in 2014.
This time won’t be any different. Yes, Alibaba has real challenges. All big companies do, no matter where they’re headquartered. Successful companies push through those challenges and keep going and growing. Alibaba will be no different.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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