A major new revelation struck for Chinese e-commerce great Alibaba (NYSE: BABA).
The revelation in question comes from a major investor who recently hiked their stake in the company substantially. While that investor seems happy to buy in, I’m much less certain myself.
Therefore, I’m shifting to neutral on Alibaba, a company that’s looking at a lot of problems, but also a growing slate of opportunities.
Alibaba’s year in share price so far has been in a state of generally rapid decline. The company enjoyed a terrific January last year, spending much of it on an upward track.
The party lasted until just after Valentine’s Day, when Alibaba began a heartbreaking plunge that lasted until October. While Alibaba posted minor gains in that time, they were often wiped out within days of showing up.
October started a rally for the company, going from around $139 to just over $177 in about two weeks. However, these gains didn’t hold, and the company once more started losing ground. Then, the slow slide sped up as Alibaba shares lost $50 in the space between November 15 and December 1. This brings us to the present day, where Alibaba shares hover around $127.
The latest news gave Alibaba a big shot of adrenaline in trading. The news features Daily Journal Corp., which nearly doubled its current stake in the company.
If Daily Journal isn’t a familiar name, its current chairman will be. It’s none other than Charlie Munger, of Berkshire Hathaway. Daily Journal bought an additional 99.3% of its current holdings, bringing the total share count to 602,060. The current value of Daily Journal’s holdings in the firm is around $75 million in today’s prices.
Wall Street’s Take
Turning to Wall Street, Alibaba has a Strong Buy consensus rating. That’s based on 19 Buys and three Holds assigned in the past three months. The average Baba Stock Prediction of $202.70 implies 59.6% upside potential.
Analyst price targets range from a low of $140 per share to a high of $252 per share.
Potentially Worthwhile
Daily Journal’s huge new buy in Alibaba made me wonder. After all, we’re looking at a company that was coming under fire from Chinese regulators, which are some of the most stringent around.
The company was also looking at some serious issues economically, as a potential slump in China would wipe out a lot of discretionary income. An e-commerce play like Alibaba generally depends on discretionary income to get much of anywhere.
There were also concerns, going back a couple years now, about the potential for Chinese stocks to be delisted from exchanges in the U.S. Such a move would limit the range for these stocks, and with fewer investors, the result would have been significant share price losses.
However, those concerns look to be fading away, as policymakers in the U.S. have little political appetite for cutting off stocks from exchanges right now.
This makes Alibaba and its class much safer investments than they were previously. Plus, Alibaba is trading at a significant low point right now.
For anyone who wants to get involved in a Chinese e-commerce play, this would perhaps be the best time to do it. Munger’s move into this stock is almost a personification of the old advice to be greedy when others are fearful, and fearful when others are greedy.
Those hoping to make Alibaba an income play, however, will be sorely disappointed. Alibaba’s dividend history reveals that it has no dividends in the pipeline. It also appears to have never actually offered one in the first place.
Concluding Views
This is where investing becomes little more than a gut check. If you believe that the stock can make its way back to levels seen earlier this year, then it’s a great time to invest in Alibaba.
Whether you think the current prices have created an opportunity or a danger signal is up to you. I’m shifting my own opinion to neutral, because Alibaba’s spectacular bargain pricing stands alongside the dangers it faces in the segment.
That’s such a pure balance that it’s hard to call it one way or another. Alibaba is a flipped coin that has landed, almost impossibly, on its edge.
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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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