Over the past year, Alibaba (NYSE: BABA) stock has crashed nearly 60%. And over the past four weeks, the sell-off has only accelerated. Shares in the Chinese e-commerce giant have fallen 31% since the beginning of November.
While I can understand why the market has been selling the stock, I think current investor concerns overlook the group’s true potential.
The outlook for Alibaba stock
As one of the largest e-commerce groups in China, Alibaba’s market opportunity is massive. And when I say massive, I mean genuinely massive. It is projected that by 2024, e-commerce sales in China will be worth more than $3.3trn a year.
And that leading position means it has around 51% of the Chinese market, although this share has been under pressure in recent years. Some estimates suggest it could fall below 50% for the first time next year.
While this is disappointing, it needs to be put into perspective. Amazon‘s share of the US e-commerce market is around the same, but this company has a market capitalisation of $1.7trn. Alibaba’s market value is $300bn. The size of the US e-commerce market is less than $1trn.
So Amazon has the same share of a smaller market and is worth five times more. This does not make much sense to me. Even though it is losing market share, I think Alibaba deserves a higher valuation than Amazon, considering its position in a much bigger market.
That said, Alibaba does have a smaller global footprint. Its presence outside of China is almost non-existent. What’s more, the American retailer is more diversified. Its cloud computing and marketing businesses now provide more profit than the retail side of the company.
China threats
Alibaba does have a level of diversification away from the retail side of the business, but, again, this is mostly concentrated in China. More importantly, Chinese regulators do not want companies like Alibaba to expand too much overseas. They argue that this could jeopardise national security if overseas regulators demand access to valuable data resources.
The risk that Chinese regulators will clamp down on Alibaba is one of the primary reasons why the stock has fallen so far, so fast, in recent weeks. The clampdown has already claimed one company, ride-sharing group DiDi, which has been asked to delist from the New York Stock Exchange and relist in Hong Kong.
This is a significant risk, and it is impossible for me to quantify. I am not going to pretend to know what is on the mind of Chinese regulators. As such, I cannot say with any certainty if they will decide to clamp down on the business or not.
Considering this risk and the market opportunity available to the group, I would be happy to buy the stock for my portfolio, but only as a small speculative position. I think the company’s potential is clear, but so are the risks.
