Since Friday last week, Alibaba stock has steadily plummeted, hitting its lowest valuation in 11 months. Prior to this, the company had announced its expectation of weaker revenue growth caused by China’s slowing economy and the tough crackdown on tech companies by President Xi Jinping’s administration.
The Chinese government has increased its regulatory scrutiny of tech giants in the country since last year. Alibaba, Tencent, Baidu and ByteDance are just a few of the companies that have felt the sting as a result of the new government policies that enforce strict guidelines on companies operating in the tech space.
The ostensible reason sighted by the Chinese government to justify its actions is that accusation levelled against Tech giants operating in-country regarding their anticompetitive practices and their use of the data they collect from the public.
Jack Ma, the billionaire founder of Alibaba, briefly disappeared from the public eye after his Fintech company Ant Group’s planned November 2020 $35 million IPO was shut down by regulators. Jack Ma’s troubles only deepened when Alibaba was fined a whopping $2.8 billion in April 2021- the highest antitrust penalty ever imposed in China. The company’s shares are down nearly 40% this year.
In its earnings release last week, the company sighted the country’s regulatory environment and its concerns about the privacy and data protection regulations as factors that could hinder its business operations.
The US-listed shares of Alibaba Group Holding Ltd were off 9.6% on Thursday last week, after the company realeased its latest financial results. The company reported a fiscal second-quarter income of RMB5.4 billion ($833 million) or RMB 1.97 per American depository share. On adjusted basis, Alibaba 9988, -0.90% BABA, -0.47% earned RMB 11.20 per ADS.
In a statement in response to the company’s latest earnings call, the Chief Financial Officer of Alibaba, Maggie Wu, stated, “If you look at our guidance and then try to derive the second-half growth, that would imply revenue growth at the teens.” She noted the fact that China’s GDP and consumption had slowed in general. Wu stated that Alibaba’s strategy to diversify its revenue streams by focusing on cloud computing and international markets would positively affect the company’s revenue.
Despite this, Alibaba, like other tech giants in China, has to make drastic changes to its mode of operation to appease the government and fall in line with the tight regulations imposed on them.
With this in mind, investors have been wary of investing in Chinese companies, especially since the government showed its readiness to use a firm hand in the way it enforced the penalties. However, analysts at Morningstar investment research have their eye on one of Alibaba’s competitors, JD.com (JD). The eCommerce company’s stock has experienced steady growth this year of more than 6%- a performance that might not warrant the red carpet but nonetheless speaks to a solid growth trajectory.
“Among our e-commerce coverage, we prefer JD over Alibaba as there is more clarity on the long-term margin improvement at JD versus the level margin decline for the next few years at Alibaba,” said Morningstar’s Chelsey Tam.
In contrast to Alibaba’s quarterly results that were released last week, JD.com’s earnings registered a 25% year over year jump in quarterly revenue. Tam asserted that the enthusiasm around JD.com is based on the higher certainty about positive profit margin and profit growth trends.
JD.com stock has been valued at a fair value estimate of $113 by analysts at Morningstar investment research. A deeper look at the justifications given for Morningstar’s preference of JD.com stock over Alibaba is based on factors such as less exposure to the discretionary segment of fashion and apparel, which was affected badly by the macroeconomic conditions, the size of Alibaba works as a deterrent to growth because its growth should converge with industry growth.
Alibaba might have faced a tough year, but the situation isn’t all doom and gloom as far as the analysts at Morningstar are concerned- they give the stock price a fair value target of $188, a nearly 40% upside- although that fair value estimate was further slashed by one-third.
“We continue to believe the stock is undervalued, and we retain confidence in its network effect. The company operates platforms with the largest number of merchants and has the highest gross merchandise value per user in China,” said Chelsey Tam.
Alibaba (ticker: BABA) stock fell 2.1% since Tuesday, bringing losses in one month to just below 25%; on the other hand, JD.com stock (JD) jumped 2.4% and has climbed nearly 8% over the past month.
Whatever the future holds for Alibaba, investors will be watching with bated breath to see whether the company can strategize effectively and restore itself back to its former glory. In the meantime, President Xi Jinping continues to enforce strict measures to curb what he perceives as the harmful practices of big multinational brands operating in China, which will further hinder the company’s growth prospects.