Alibaba & The Chinese Freeze

What’s The Deal With Alibaba Stock?

Today, Great Ones, we’re taking a deeper dive into Alibaba (NYSE: BABA).

Because mutiny on the bounty’s what China’s all about, Xi’s gonna board your ship and turn it on out. You don’t want to be a soft sucker with a parrot on your shoulder, right?

Well, I’m bad, gettin’ bolder … cold, gettin’ colder … on Alibaba. And we don’t need 40 thieves to make investing in BABA stock right now worrisome.

China and President Xi Jinping are doing that all on their own.

For the past month, China has terrorized suckers on Wall Street. And if you’ve got beef, Xi’ll cap you in the knees. He’s already shot more than a few U.S.-listed Chinese stocks, and he’ll shoot the rest.

OK, enough Beastie Boys … let’s get down to brass tacks.

When it comes to Alibaba, I absolutely love everything about the company. This massive Chinese online retailer, web portal, social media platform, mobile commerce … you know what? We’ll be here all day at this rate.

Let’s just say that everything Amazon does, Alibaba does just as well, if not better … only, it operates in Asia.

For the past 10 years, Alibaba averaged annual revenue growth of 33.4%. That’s insane and a testament to the strength of the growing Chinese and South Asian middle class. Remember the middle class? The U.S. used to have a middle class … but I digress.

Furthermore, Alibaba’s active user base skyrocketed from 231 million in 2013 to more than 780 million in 2021. Mobile active users jumped from 265 million in 2014 to a whopping 902 million.

Now, those numbers sound great and all, but how do they measure up to the competition? Luckily, I have a banana for scale! Err, rather, an Amazon for scale!

So, in the past 10 years, Amazon averaged annual revenue growth of just 21.4%. What’s more, the “world’s largest e-commerce giant” only has about 310 million active customer accounts worldwide. Some 200 million of those are Prime subscribers.

As you can see, Alibaba dwarfs Amazon in both revenue growth and subscriber counts. And keep this in mind: Amazon is pretty much global while Alibaba is active only in China and South Asia.

Alibaba & The Great Chinese Firewall

I can hear you already, Great Ones: If you love Alibaba so much, why don’t you marry it?

Well, there’s this whole “China” thing, you know? And it’s a pretty big deal.

Back in April 2020, China flexed its authoritarian muscles and probed Alibaba … which is just as disturbing as it sounds.

The country’s regulatory bodies then halted Alibaba’s Ant Group IPO and fined the company $2.8 billion for anticompetitive practices even as it ordered changes to the way Alibaba operated.

And if that scares you, just take a look at this list:

• On August 10, China’s Central Committee laid out a new five-year plan for greater regulation across a broad scope of technology and financial companies.
• On August 17, the Ministry of Industry and Information Technology issued new rules for online platform operations like Alibaba.
• On August 20, China implemented a new data privacy law that could impact Alibaba’s business — especially from an advertising and marketing perspective.
• On August 27, China issued guidelines for regulating AI and algorithms used by internet companies to make user recommendations … because of privacy concerns, of course.
• On September 9, China halted approval for new online games and limited gaming time for certain age groups.
• On September 13, China reportedly started pushing for Ant Group to spin off Alipay to a different app separate from Ant’s lending app.

Unlike in the U.S., where companies can go to court to challenge these rulings — which are typically telegraphed months in advance — Chinese firms have little if any recourse.

Now, we both know these changes are not just willy-nilly. But since China gives no warning or indication that it’s even thinking about punishment or regulation, it might as well be on a whim as far as investors are concerned.

And therein lies the problem with investing in BABA stock.

Should I Stay, Or Should I Go?

I’d like to round out today’s TED talk on Alibaba with a question from one of our own Great Ones:

Thank you for writing in, Joan. If you’ve made it this far today, I think you know what you need to do.

But just so we’re on the same page, let’s break things down.

Alibaba has amazing prospects, but it has equally amazing uncertainty. Because of this uncertainty, BABA stock is down about 50% from its October 2020 highs near $305.

Do I think BABA will reach those heights again? Yes, but it’ll take a lot longer to get back there than you’d think.

First, China needs to lay all its regulation plans on the table so that Wall Street can unload this uncertainty burden.

Second, China needs to back off and let Alibaba do its thing.

These things will happen … eventually. Maybe as early as the end of this year. Who knows? It’s China. Only Xi knows.

If you have the patience and stomach to ride out this storm, you’re gonna make some money with BABA. However, since China isn’t done regulating, you could also lose more money before you make more money. Hence, riding the storm out.

Now, Joan is in retirement and is looking at a long-term investment plan. BABA kinda fills that role, but you’ll want to set it and forget it … or invest in a hefty side of Mylanta.

I won’t deny it: There’s the potential for a nearly 100% gain on BABA stock if it heads back to all-time highs … but that’s if (and only if) China finally stops messing with $##@.

In my opinion, BABA stock is not a buy right now. It’s a hold. In other words, if you don’t already own it, don’t buy it. If you already own it and you’re looking for a long-term investment with more ups and downs than most long-term investments, keep holding.

That said, the further BABA stock falls, the more tempting it becomes — Chinese regulations or not. China isn’t stupid — it knows that Alibaba is a cash cow, and it’s not going to kill Alibaba.

We’ll know just how bad these regulations are following Alibaba’s next quarterly report. I’m holding out until then to make a final investing decision, and if BABA shares look enough like a bargain then, we’ll reconsider buying in.

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Thanks for tuning in to the Great Stuff weekend edition. Have a tremendous rest of the weekend, Great Ones!

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Until next time, stay Great!

Joseph Hargett

Editor, Great Stuff