It’s often said that Alibaba (NYSE: BABA) is China’s answer to Amazon. But with a market cap of $394bn, it’s roughly only a fifth of the size of its American competitor. At $145 today, the Alibaba share price is down 47% since this time last year. And it’s dropped 6% in the past week alone. When a growth stock falls this drastically, it’s likely that more investors are selling than buying. And there’s generally a good reason why.
However, the low entry point might represent a buying opportunity. And while the stock has seen better days, it’s risen 37% over the past five years. So why has it been falling recently?
Alibaba was hit with a $2.8bn fine from Chinese authorities for anti-competitive practices earlier this year. And Beijing has continued to hand out smaller fines for regulatory breaches over the past few months. That makes me worried for the continued growth of the company.
And then there’s Jack Ma, Alibaba’s controversial co-founder. In October 2020, he commented that the Chinese banking system was an “old people’s club,” and that China must abandon “the pawnshop mentality of banks.” Then he disappeared for months. Beijing suspended the $37bn IPO of Ma’s Ant Group, citing risks over China’s financial system.
Alibaba owns a third of Ant Group, which in turn owns Alipay, China’s largest digital payments platform. Ma’s vision was to shift power away from traditional institutions, but regulatory interference stopped it from happening. That’s a key concern for the stock. Its uncertain how large Alibaba will be allowed to grow.
Then there’s China’s “common prosperity” agenda to redistribute wealth. The company is already making a contribution of $15.5bn by 2025, which will put a huge dent in profitability. And there’s no guarantees that this ‘contribution’ won’t increase.
Alibaba share price compared to Amazon
It’s tempting to compare the Alibaba share price to Amazon for obvious reasons. In their respective territories, both are market leaders in e-commerce and cloud services.
Alibaba’s revenue grew 64% year-over-year in fiscal year 2021. Meanwhile, Amazon has posted revenue growth of around 30% a year for the past three years. And with CEO Daniel Zhang saying that Alibaba has “achieved a historic milestone of one billion annual active consumers globally,” the Chinese giant might look like a bargain compared to Amazon right now.
But their price-to-earnings (P/E) ratios tell a different story. Alibaba’s is only 17, compared to Amazon’s at 59. Apparently, investors expect Amazon to grow much more quickly than Alibaba going forward. Perhaps investors choosing between the two companies consider the Chinese regulatory pressure too high. Meanwhile, Amazon benefits from a more friendly political environment.
And China’s second-largest property developer, Evergrande, just missed a $83m interest payment. There’s a chance that the second-order contagion from Evergrande’s potential collapse might spread into the wider Chinese economy. In that event, it’s likely that foreign investors would pull some of their wealth out of China. Alibaba would almost certainly be affected.
This all demonstrates an uncomfortable market fundamental. Sentiment is important, and extremely hard to measure. The Alibaba share price may be an opportunity. And I’m not averse to the occasional high risk play. But on this occasion, it’s just not worth it for me.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charles Archer owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Alibaba Group Holding Ltd. and Amazon. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.