Is Alibaba a good stock to buy in 2022?
Alibaba Group Holding Limited (NYSE: BABA) is one of the largest e-commerce companies in the world, with a market capitalization of $348.86 billion. It has more than 1.24 billion annual active customers, as of September 30, 2021, including 953 million customers in China and 285 million customers overseas.
Alibaba’s revenues increased 29% year-over-year in the quarter ended September 30, 2021, to $31.15 billion. Net income and EPS amounted to $833 million and $0.31, respectively.
Aside from its dominance in the global e-commerce market, BABA has also been a key player in the cloud computing space. Alibaba’s cloud computing services dominate the Chinese public cloud market, with a 38.3% market share. After surpassing Google, it became the third-largest player in the global Infrastructure-as-a-Service (IaaS) market in April 2020. It is also the largest cloud computing services provider in the Asia-Pacific region.
Federal Crackdown Impacted BABA Stock
BABA was well on track to dominate the global e-commerce market, with strategic investments and expansion plans. However, the company attracted regulatory scrutiny from Chinese authorities in November 2020 due to its perceived monopolistic practices and has since suffered heavily due to the government’s big tech crackdown.
Alibaba witnessed a decline in adjusted profits for the first time in the last reported quarter (ended September 30, 2021). Its net income fell 39% year-over-year, while non-GAAP earnings per share declined 38% from the same period last year in the fiscal second quarter.
Daniel Tu, founder and managing director of Hong Kong-based wealth management advisory Active Creation Capital, said in an Al Jazeera interview, “Because of its size and wealth, Alibaba became the poster boy for the government crackdown.”
Shelved Ant IPO
Alibaba’s fintech arm Ant Financial Group was set to make a stellar stock market debut through dual listing in Shanghai and Hong Kong. The listings were valued at approximately $35 billion combined, making it the biggest IPO in history. BABA has a 33% stake in Ant Financial Group.
However, the deal was shelved in November 2020, two days before its scheduled listings in the Shanghai and Hong Kong stock exchanges, citing regulatory issues. Ant’s business model was susceptible to systemic financial risks.
Ant’s enterprise valuation was cut to less than $200 billion by Warburg Pincus, a major global investor in Ant Group. Comparatively in November 2020, the initial valuation of the fintech start-up at $315 billion.
Since then, the company has been restructuring its business model while the Ant IPO seems to be sacked indefinitely. Federal regulators have laid down guidelines for the business restructuring, stating that Ant was required to transform itself into a financial holding company like a bank under federal supervision.
Record Anti-Trust Fine
Industry experts believe that the ongoing federal crackdown on Chinese big tech companies marks the end of an era of “wild growth” in the country’s tech space. Alibaba paid $2.8 billion in fines to the Chinese Government, which was one of the largest antitrust fines in history. The Government findings concluded that Alibaba had abused its market dominance and engaged in unlawful monopolistic practices.
On January 5, 2022, China’s State Administration for Market Regulation (SAMR) imposed a 500,000 yuan penalty on Alibaba for failing to report several deals under China’s 2008 anti-monopoly law.
Potential Delisting from the U.S. Stock Exchange
The United States has been striving toward streamlining its foreign listings. The Securities Exchange Commission (SEC) finalized the rules for implementing the Holding Foreign Companies Accountable Act on December 2, 2021.
Under this law, foreign companies listed in the U.S. exchanges are required to meet the audit requirements set by the Public Company Accounting Oversight Board (PCAOB). Chinese companies are infamously known for not submitting to these requests. However, under the new rule, Chinese ADRs stand to be delisted if they don’t meet the PCAOB auditing requirements for three consecutive years.
Asia Markets recently reported that the Biden administration is currently investigating BABA’s cloud computing business segment to determine whether it poses a threat to the U.S. national security. The regulatory probe seeks to decode how Alibaba stores the data, personal information, and intellectual property of U.S.-based users and clients.
If these investigations garner merit, American firms could be ordered to stop transacting with one of the most valuable Chinese tech companies. Alibaba stands to lose its industry-leading position in the cloud computing space as well, in that scenario.
The company has considered this as a possibility, as it stated in its last annual report that U.S. companies “may be prohibited from continuing to do business with us, including performing their obligations under agreements our…cloud services.”
BABA’s growth trajectory has been slowing amid heightened regulatory scrutiny and global macroeconomic headwinds. BABA registered an 8.45% growth year-over-year in 2021 for singles day sales, which is the biggest shopping day event globally. This marks the company’s slowest Singles day sales growth rate in history.
However, analysts have maintained a bullish outlook regarding the company’s revenue growth outlook. The consensus revenue estimates indicate a 22.6% rise year-over-year and a 16.8% increase next year. However, its top-line growth is not expected to translate to bottom-line growth, as its operating and legal expenses are expected to rise. The Street expects BABA’s EPS to decline 6.3% in the fiscal first quarter (ending March 2022) and 17.2% in the current year.
BABA stock has mixed analyst ratings as well due to the worsening U.S.-China relations. Atlantic Equities recently downgraded its outlook from ‘Overweight’ to Neutral, while Argus Research firm downgraded BABA from Buy to Hold.
However, Barclays and Needham’s analysts have maintained an overweight rating for the stock.
So, what’s the bottom line?
Is Alibaba a good stock to buy?
After a tumultuous two years, Alibaba’s performance is expected to stabilize in 2022, provided the Chinese authorities don’t impose additional fines or regulatory orders. However, the increasing competition in the Chinese e-commerce market might be expected to keep Alibaba on its toes as the company navigates to recover its losses incurred over the next two years.
Moreover, the company’s cloud computing business segment might incur losses if the U.S. imposes any restrictions on transactions. Nonetheless, analysts expect the company to maintain its position as a leading global e-commerce platform.
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