Alibaba (BABA) is a major name in Chinese e-commerce. Given the state of Chinese e-commerce — which has been explosively rising for years — that’s nothing to take lightly.
Recent trading for Alibaba has been more disastrous than anything, though, and the company took a serious hit after its latest earnings report. A closer look at what happened to the company makes me even more bearish.
Looking at Alibaba stock charts for the year so far shows a major venture clearly in retreat. Alibaba’s stock has been in a protracted but slow state of decline for much of 2021.
Early gains in January into the middle of February were lost in late February. A bit of a plateau kicked in before late April saw a second leg down. Late June brought with it a bit of recovery. That ultimately turned into the start of the third and most pronounced leg down yet.
What happened? The latest news out of Alibaba is nothing but down. Alibaba posted revenue of $31.1 billion against an expected $32.1 billion. Earnings per share came in not only below expectations for this quarter, but also were down over a third, 38%, against last year’s figures.
The company posted around $1.75 per share against estimates of around $1.94 per share. In a development that added insult to injury for investors, the company projects a growth rate between 20% and 23% for this year. Analysts were expecting 28%.
Alibaba issued a statement along with the earnings release. Therein, it pointed to “regulations” along with growing “…privacy and data protection regulations and concerns” as issues hurting the company. (See today’s best-performing stocks on TipRanks)
Wall Street’s Take
Turning to Wall Street, Alibaba has a Strong Buy consensus rating, based on 20 Buys, two Holds, and one Sell assigned in the past three months. The average Alibaba price target of $216.10 implies 61.7% upside potential.
Analyst price targets range from a low of $170 per share to a high of $275 per share.
Government Issues
On the surface, being bullish on Alibaba should be the most natural thing in the world. It’s got massive upside potential. It’s currently trading a lot closer to its lowest targets than its highest. Alibaba is described by many as the Amazon (AMZN) of China. An Amazon that focuses on roughly one-sixth of the entire planet’s population is a very big deal.
Except there’s one major problem: Beijing. Alibaba owns about a third of Ant Group, which is directly connected to Ant Financial, which runs Alipay.
Alipay is China’s biggest mobile payments service, and the service that most Chinese turn to for large-scale purchases. Alipay is a big deal. So big, in fact, that for a while back in April, the Chinese government seemed particularly threatened by the fact that Alibaba and Ant Group were so closely connected. The Chinese government also socked Alibaba with a $2.78-billion fine at the time as part of an anti-monopoly investigation.
This seem like a potential problem of a very large scale that could easily come back to hit Alibaba once more. Worse, that’s just for starters. There are significant and disturbing signs that suggest the Chinese economy may be in for a rough patch to come.
The China Evergrande (EGRNF) disaster is about to bloom into something even worse. S&P Global Ratings now says that China Evergrande will likely default on its debt, mainly because the company has lost its main business.
Not only is China Evergrande the second-largest real estate developer in China, but it’s also one of the most heavily indebted firms on the face of the Earth. That may not have much impact on Alibaba directly, but the knock-on effects could have Chinese citizens pulling in their wallets and buying less with Alibaba.
Concluding Views
Certainly, there’s a case for investing in Alibaba. The company is trading at its lowest levels in years, which suggests an opportunity afoot. There’s substantial upside potential here as well. The average price target is within reach, and the high price target is a possibility.
The overall state of China’s economy is concerning, however. Throw in an antagonistic government and things only get worse. I can’t blame anyone who pursues Alibaba at this stage. However, I won’t recommend it. There are simply too many potential points of failure to put much into Alibaba going forward, at least for now.
Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.
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