Just when some investors were beginning to think the worst was over, shares of e-commerce giant Alibaba Group Holding (BABA, Financial) plunged 11% on Nov. 18 and 2% more on the next day, adding to the stock’s massive selloff following the company’s announcement of weaker revenue growth expectations along with China’s slowing economy and Beijing’s ongoing regulatory crackdown on tech companies.
Over the last few years, the company achieved tremendous growth to transform itself from a traditional e-commerce company to a conglomerate with a presence in many business sectors such as logistics, food delivery and cloud computing. Thus, despite the short-term headwinds, the recent decline in the stock price could present a good value opportunity for long-term investors.
From hitting a high of around $317 per share in October 2020, Alibaba shares have plunged to around $135 as of Nov. 24, and regulatory issues had a big role to play in this massive decline in market value. The sell-off was originially triggered as a result of Alibaba founder Jack Ma’s critical comments on business regulations in China, which brought about greater scrutiny on the company's business practices and a broader tech sector crackdown, but since then, many other reasons to be bearish on Alibaba have emerged, such as a deceleration in revenue growth rates and the slowing down of the Chinese economy.
Alibaba has been accused of anti-competitive practices while gathering large amounts of private user data. Last April, government regulators fined Alibaba a record $2.8 billion - the highest-ever antitrust penalty imposed in China - for acting as a monopoly. China's market regulator mentioned last Saturday that fines will be imposed on Alibaba for failing to declare 43 deals since 2012 as well, in the amount of $78,000 for each undisclosed acquisition.
Alibaba reported revenue of 200.7 billion Yuan ($31.15 billion) for the quarter ended Sept. 30, registering a growth of 29% from the corresponding period last year. If not for Alibaba’s China commerce retail business, which includes the positive contribution from Sun Art, revenue would have only risen by 16%, despite the strengthening cloud computing business arm. This realization contributed to the recent decline in the stock price, and the company missed both earnings and revenue estimates of analysts, which was the other major reason behind the stock price decline in the last week.
Non-GAAP earnings of $1.74 per share represented a decline of 38% compared to the fiscal second quarter of last year, but operating income grew 10% while the operating margin contracted 200 basis points to 7%. Several factors, including an increase in sales and marketing expenses, contributed to this margin contraction.
Historically, Alibaba has been able to generate adjusted Ebitda growth on an absolute basis. However, Ebitda fell 8% in the June quarter and another 32% in the September quarter, sending shockwaves among investors who were expecting the company to perform much better.
Outlook for the company
For fiscal 2022, Alibaba now expects revenue to grow 23% year-over-year, down from the previous forecast of 29.5%, which will be the smallest gain since its market debut in 2014. This outlook painted by the company proved to be well below the estimates of analysts, and the stock price is, therefore, likely to remain under pressure in the foreseeable future.
As acknowledged by the company, regulatory threats need to be taken seriously. According to CFRA Research Vice President John Freeman, Alibaba even has a delisting risk. Not only does Alibaba face tough competition from established yet smaller competitors, but these smaller platforms are also benefiting from the anti-monopoly regulations on tech giants as well.
Alibaba, despite all these challenges, continues to expand into the U.S., but it will take some time for the company to replicate its success in China in other markets. Sellers based in the U.S. will soon be able to enter the Alibaba ecosystem, which could be a catalyst for revenue growth in the coming years.
One important thing to note is that in China, the company has emerged as "too big company to fail," and Alibaba is often considered as the face of China’s tech innovation. For this reason, it would be rational to assume that the company will be able to reach some middle ground with regulators in order to ensure the country's prosperity, and when that time comes, the market sentiment toward Alibaba stock should improve dramatically. Patiently waiting for this outcome could be a rewarding move for long-term-oriented investors, but Alibaba stock is bound to remain highly volatile until regulatory threats are resolved, and there is still the delisting risk.
Investing in stocks is about striking the right balance between the risks of an investment and the possible returns. Investing in Alibaba stock is certainly not for every investor, but for value investors who are comfortable with a high level of risk, the risk-reward profile seems very attractive at current prices.