Over the course of this year, Alibaba (NYSE:BABA) has been in the news a lot. Unfortunately, it has mostly been for the wrong reasons. This has been partly reflected in BABA shares moving lower since the start of 2021. From a level this time last year of $250, the stock currently trades at less than half that value at $120. But for a well established and fast growing business, is this a bargain buy?
Friction with local authorities
Firstly, it’s important to understand why the shares have fallen so much this year. They trade in the US but are also listed in Hong Kong.
The business has come under scrutiny recently due to tensions rising between China and the global companies that hail from the country. For example, in recent weeks a Chinese company named Didi has decided to delist from the US and will list in Hong Kong instead. Many see this as a reaction to pressure from the Chinese Government.
The shares have fallen showing that even the shining star of Chinese e-commerce isn’t immune to the pressure. Co-founder Jack Ma even dropped out of sight for a couple of months at the turn of this year. This didn’t do the public image of the company any good. As for the business, it was fined $2.8bn by the Chinese market regulator for monopolistic abuse in Q1. This was quite a large amount, 4% of the company’s 2019 domestic revenue.
The bottom line here is that investors are clearly nervous about the relationship between Alibaba and the Chinese Government, as well as the influence being exerted.
Strong financials for the shares
If I strip out the noise around the authorities, there are many reasons to like the shares based on financial performance. Last month, quarterly results showed a revenue increase of 29% year-on-year. Although adjusted EBITA actually fell by 32%, this was largely due to investments made in key businesses within the group. Therefore, I’m not too concerned about this. If anything, the investments should help to grow overall profitability in years to come.
Alibaba is also growing the active customer base. This is key as the ecosystem that the business is trying to push needs a high volume of clients to make it successful. In the results, it noted an annual active customer base of 1.24bn, an increase of 62m from the previous quarter. The overall figure is impressive and will help to drive the business forward in 2022.
Overall, it’s a difficult call as to whether I should buy the shares now. They do look cheap, and I think the strong growth shown by the latest results isn’t reflected in the current share price. However, I’m very conscious of the influence that the Chinese Government has over the actions of the firm. If further measures are taken, such as restricting operations abroad, then I could easily see the share price slump further.
Therefore, as much as I like the business, I think it’s too much of a risk to buy shares at the moment.
