The Alibaba share price is down 30% this year. Will it recover?

The Alibaba share price is starting to look cheap. But the company is facing some significant headwinds to growth it will have to overcome.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Stack of one pound coins falling over

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Alibaba (NYSE: BABA) share price has plunged a staggering 30% this year. The stock is off around 70% after these losses over the past 12 months.

Shares in the Chinese e-commerce giant have come under pressure for several reasons. The decision by Chinese policymakers to start clamping down on high-flying technology groups sparked the sell-off. Since this threat emerged, investors have been struggling to digest other risks to the company’s growth potential.

These include everything from additional regulations, the trade war between China and the US, and competitive forces in the global technology market.

However, despite these challenges, the company remains one of the largest e-commerce groups in China. It is also investing heavily in new growth initiatives, such as cloud computing.

Considering these tailwinds, I have been trying to evaluate if it is worth adding the stock to my portfolio after recent declines.

Alibaba share price risks 

While the company might look cheap compared to its potential, the Alibaba share price is not a traditional investment. The stock is traded through what is known as a Variable Interest Entity (VIE).

This structure allows Western investors to own part of a Chinese business although they do not actually own a piece of the underlying business. Instead, they own part of a network of offshore entities, which have a claim on the underlying company’s profits.

The problem with the structure is that it is not legal. Nor is it technically illegal. It is a grey area. And this is another reason why the market has been avoiding the stock over the past 12 months. There is some concern that the structure could fall foul of regulations.

This is the primary reason why I have always stayed away from the Alibaba share price. If Chinese regulators wanted to cut the company off from New York, they could do so at a moment’s notice. While I think this is unlikely, it is a risk I need to consider before investing.

I have also been considering the general regulatory environment for the tech sector worldwide. This is shifting and technology companies are having to work to appease regulators. Ultimately, I believe this will lead to lower returns for investors.

Opportunities ahead 

That is not to say these companies have a bleak future. I believe businesses like Alibaba will be able to capitalise on the growing demand for e-commerce and e-commerce products worldwide. It already has the logistics to capitalise on this growth. Competitors may struggle to replicate this advantage.

What’s more, the business has a strong balance sheet and is generating vast amounts of cash. These resources can be used to further the company’s expansion and grip over its core markets.

Still, while I think the business does have some desirable qualities, I cannot get the regulatory threats out of my head. There is no telling how regulators in China and the US will react over the next 12-24 months. On that basis, even though the stock looks cheap compared to its past trading history, I am not in a rush to buy the shares.

I would rather sit on the sidelines and see how the regulatory environment evolves over the next couple of years. I do not think the stock will recover from its losses any time soon. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »