Many investors are optimistic about their Alibaba Group Holding Ltd. (BABA, Financial) investments as they believe they're getting into a stock while it's still at a bargain price. Many even believe that Alibaba might become the next Amazon.com Inc. (AMZN, Financial) and provide significant upside. But, unfortunately, I'm afraid I have to disagree.
Ownership issues
It's illegal for a foreigner to own shares in a Chinese internet stock listed in China. Investors thus purchase depositary receipts, which don't have voting rights. Although retail investors aren't too concerned with voting rights, many institutional investors are.
Acquisitions
Many believe that big tech companies grow organically, but asset and data acquisition are key value drivers. Alibaba has completed over 300 acquisitions since its inception. Synergies are to be benefited from such acquisitions, but they're costly and have integration risks.
Competition
China has made significant progress with its transformation into a highly-skilled economy since Alibaba has gained traction. As a result, there's rising competition from companies such as Tencent (HKSE:00700, Financial) and JD.com (JD, Financial). China generally wants to maintain industry competition and is against the idea of big tech domination. Suppose regulators come down on acquisitions in an adverse manner. In that case, the company's growth will slow down as vertical and horizontal asset acquisitions are a big part of what's made the company successful.
Performance and valuation
First of all, by looking at Alibaba's performance over the past year, we can see it was one of the misses during the China tech stock boom. Many investors have remained optimistic, but the stock hasn't moved even as Alibaba's continued to crunch earnings. As such, its justified forward price-earnings value is 224.21.
Alibaba's stock is set for a gain of around 4% between now and December 2022. The quantitative model shows the stock's likely to underperform the market. When one adds the factors mentioned to the equation, you'd have to conclude that the stock's future doesn't look promising.
Final word
Many investors are clouded by Alibaba's success as a business rather than understanding what's moving the share price. Alibaba isn't a buy at the moment due to various regulatory obstacles and inefficient acquisitions.
