This past weekend, Chinese regulators concluded their anti-monopoly investigation of e-commerce and tech giant Alibaba Group Holding Ltd. (BABA, Financial), fining the company $2.8 billion for placing illegal restrictions on its third-party merchants.
Investors cheered the news on Monday, bidding the stock up more than 9% to around $244.01 throughout the day's trading as many were no longer deterred by the uncertainty of pending regulatory concerns.
The investigation
Alibaba drew increased regulatory scrutiny in October last year after its billionaire founder Jack Ma made comments that were critical of China's regulatory system. Of course, regulators had already been keeping an eye on the business due to its staggering growth and domination of the Chinese e-commerce space, but Ma's comments served as the straw that broke the camel's back in this case.
At that time, the company was about to spin off its fintech business Ant Group, which would have been the largest initial public offering in history if it had been completed successfully. However, speaking at the Bund Summit in the eastern financial hub of Shanghai, Ma called for a complete revamp of the financial services sector based on big data, a move which would of course be hugely profitable for Ant Group. He also criticized regulators for stifling such innovation.
Many of Ma's comments raised concerns that the company was acting to establish a monopoly. Ant Group's IPO was cancelled, and in mid-December, Chinese regulators opened an anti-monopoly investigation on Alibaba. The investigation centered on the company's practice of blocking its vendors from selling their wares on other sites. According to China's State Administration for Market Regulation, the practice deliberately stifles competition and "infringes on the businesses of merchants on the platforms and the legitimate rights and interests of consumers."
Following the conclusion of the anti-monopoly investigation, Alibaba said it will comply with regulators' requirements. In addition, the company said it will lower the fees it charges merchants that were affected by the monopolistic practices and also invest in new services for them.
Although this will cost the company up-front and in the long term, Alibaba's management views this as an ongoing investment in the company's future success. "We will incur additional cost," Alibaba's Chief Executive Daniel Zhang said on Monday during a conference call with analysts. "We don't view this as a one-off cost. We view this as a necessary investment to enable our merchants to have a better operation on our platform."
Uncertainty has kept the stock depressed
Alibaba's executive vice chairman Joe Tsai seems to have summed up both the company's and investors' feelings about the anti-monopoly investigation and its conclusion: "We are pleased that we are able to put this matter behind us."
With a pending regulatory investigation, investors (especially foreign investors) were wary of taking a chance on the stock, uncertain of to what extent regulators would go to break up Alibaba's clear dominance in the Chinese e-commerce space. Such fears turned out to be overblown, as they often are in such cases, so as soon as news came out of the conclusion, those who have had their eyes on the stock began to snap up shares.
As of Monday, the company's price-earnings ratio stands at 28.45, up slightly from the preceding weeks but still lower than the company's 10-year median of 39.13. The GuruFocus Value chart rates the stock as significantly undervalued due to its past returns and growth and the strong growth that analysts are expecting the company to achieve in the coming years.
Value investors have taken notice
Over the past couple of years, Alibaba is one of the few stocks that many value investors have considered to be a true value opportunity, i.e., a great company trading at a great price with relatively low risk (the company is not on the verge of bankruptcy like most other "undervalued" stocks seem to be these days).
Often referred to by Americans as the "Chinese Amazon (AMZN, Financial)," Alibaba has grown its revenue at a staggering rate of 45% per year over the past three years, and its Ebitda is only slightly behind at a three-year growth rate of 38.1%.
Of the investing gurus followed by GuruFocus, 36 hold shares of Alibaba as of their most recently-reported quarter. Baillie Gifford & Co. owns the largest holding in the stock with 0.92% of shares outstanding, followed by Ken Fisher (Trades, Portfolio) with 0.52%, Primecap Management with 0.46%, Frank Sands (Trades, Portfolio) with 0.39% and Pioneer Investments (Trades, Portfolio) with 0.21%.
Charlie Munger (Trades, Portfolio) and the Daily Journal (DJCO, Financial) also made headlines recently on the revelation that, as of the end of March, the Daily Journal has established a new position in Alibaba worth 165,320 shares, making it the third-largest holding in its portfolio with a 19.02% weight. As far as the public knows, this is the first common stock buy that Munger has made for the Daily Journal since 2014.
According to a statement from the Daily Journal published by Barron's, "Daily Journal Corporation has and needs securities held as cash equivalents. These cash equivalents would normally be U.S. Treasury Bills. But, with returns on Treasury Bills now so low, the company instead, invests in common stock." The statement added that only companies with long-term prospects that "seem good" can serve as replacements for the treasury bills, with the implication that Alibaba is one such company.
Conclusion
After clearing a major block to its stock price with only a $2.8 billion fine compared to its $661.88 billion market cap, investors seem optimistic that Alibaba can recover to its previous valuation levels, which would represent significant upside opportunity.
Additionally, the increased investment in services for its merchants seems likely to help draw more third-party merchants to Alibaba's platform that previously would not have considered it due to the high fees or being prohibited from listing their products on other platforms.
All things considered – clearing the regulatory hurdle, investing in merchant services, the strength of the company's network effect and the recovery of the Chinese economy, among other factors – Alibaba could be set for a strong run in 2021.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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