Do Recent Regulatory Developments Make Alibaba Stock A Buy?

BABA: Alibaba Group logo
Alibaba Group

Alibaba stock (NYSE:BABA) has witnessed a big rally over the past two months, rising by close to 60% since early November. There are a couple of factors driving gains for the Internet giant. Firstly, China has been scaling back on its stringent zero Covid-19 policy and the big re-opening should bode well for e-commerce players such as Alibaba which are intertwined with the broader Chinese economy. There have been multiple positive regulatory developments as well. The threat of delisting Chinese tech stocks from the U.S. appears to have decreased, following a deal that allows U.S. auditors to access the account books of Chinese companies. Moreover, fintech major Ant Group, which Alibaba owns about a third of, was recently granted approval by China’s Banking and Insurance Regulatory Commission to increase its registered capital by 10.5 billion yuan ($1.5 billion). This could indicate that Ant is making progress with working with regulators after its initial public offering was stopped in 2020.  Moreover, Jack Ma, the founder of both Ant and Alibaba, is giving up his control of the Ant Group.  This is positive as Mr. Ma’s 2020 speech criticizing Chinese regulators was seen as being at least partly responsible for the Alibaba group’s recent regulatory woes.

While we still believe that Alibaba’s stock is undervalued, the risk-to-reward tradeoff for the stock is not looking as attractive as it was previously. At its current market price of about $107 per share, Alibaba trades at just about 14x 2023 earnings, up from a multiple of just about 9x last November. To be sure, Alibaba is still expected to grow at a reasonable pace in the coming years. Consensus estimates point to over 8% growth for FY’23 and around 11% growth for FY’24. The company’s valuation is more favorable compared to U.S. e-commerce behemoth Amazon, which trades at about 50x forward earnings, with similar near-term growth projections. However, the risks of Chinese stocks are typically higher given the regulatory and political concerns. Competition is also mounting for Alibaba’s stock in the e-commerce and cloud computing markets. We estimate Alibaba valuation at about $118 per share indicating a potential upside of 10% over the market price.  See our analysis of Alibaba revenues for more details on how Alibaba’s revenues are likely to trend.

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 Returns Jan 2023
MTD [1]
YTD [1]
Total [2]
 BABA Return 22% 22% 22%
 S&P 500 Return 1% 1% 74%
 Trefis Multi-Strategy Portfolio 2% 2% 222%

[1] Month-to-date and year-to-date as of 1/9/2023
[2] Cumulative total returns since the end of 2016

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