Founded by Jack Ma on April 4 , 1999, Alibaba has been the pride and beacon for China. It is not uncommon for Alibaba’s subsidiaries like Taobao and AliExpress to be synonymous to China.
ANT FINANCIAL IPO SAGA
However, things took a turn when founder Jack Ma publicly criticized China regulators for being too risk-averse and hence stifling innovation. In addition, he adds that there is a fundamental problem in the way banks work in China and I quote, “Today’s banks continue to have a pawnshop mentality.
In a nutshell, he sees that there is a lot to be improved on and he had been frustrated at how regulators are not able to keep up with the times.
His hunger for change was however, deemed as a threat to destabilize the Chinese government. Shortly after his speech, the Chinese government retaliated. According to the Wall Street Journal, China’s President Xi decided to personally stop Ant’s group US$37Bn Initial Public Offer.
he cancellation of Ant’s IPO sent a very strong message to investors all over the world that China’s government reign over the markets, no matter the size of the company and how influential one may be. This led to a dip in Alibaba’s stock price as investor are wary when investing in Alibaba.
However, there were more negative catalyst for Alibaba when the Chinese government ordered Ant group to return to its roots in payment services. This results in the failure to tap into the most lucrative aspect of consumer loans and wealth management, which will hinder Ant’s growth. Since Alibaba has a 33% stake in Ant, Alibaba will be negatively impacted as well.
ALIBABA ANTI-MONOPOLISTIC INVESTIGATION
In addition, China launched an anti-monopolistic investigation on Alibaba and would mete out exorbitant fines of up to 10% of the company’s fiscal year revenue. This could be in billions.
This whole saga also led to the media churning out articles such as “Where is Jack Ma?” when Ma failed to appear in a talent show. It sparked discussions on whether Ma has disappeared, incarcerated or even executed.
These news injected fear into the market which is reflected in the stock price as it dips further. Thus, all the negative news surrounding Alibaba caused investors to shy away from the company and gave a perception that Alibaba has come to the end of the road.
WHY ALIBABA WILL SURVIVE
Despite all these harsh crackdowns by the Chinese government, there is still a silver lining for Alibaba. As mentioned in the paragraph above, Alibaba group is synonymous with China and these recent events can be viewed as a “father and son conflict.”
No matter how much Chinese government wants to punish and penalize Alibaba, at the end of the daythey are still family and have “blood ties”. It is evident from an article in Forbes where it reports “.
Since the early days, Alibaba, has been supported by the Chinese government which used Alibaba's Taobao and T-mall sites to do billions of dollars of transactions between various government agencies which allowed Alibaba to post eye-popping revenues and growth in the early days.
The Chinese government still conducts a lot of trade between its various agencies using Alibaba platforms so as to ensure the continued scorching growth rates that Alibaba has been able to post year in and year out.” (Forbes)
In addition, Alibaba has fuelled the Chinese economy by decreasing unemployment rates, increasing GDP and strengthening the Chinese yuan. The Chinese government acknowledges the contributions of Alibaba and it is highly unlikely for the government to destroy such a huge company based on one speech made by Jack Ma who is “basically retired” from Alibaba and passed on the leadership role.
Furthermore, it is unlikely to see a continuation in crackdown on Alibaba as Ma and his team has been sincere to placate the Chinese government by “offering parts of financial technology giant, Ant group, to the Chinese government, according to people with knowledge of the matter.” In an attempt to “salvage his relationship with Beijing” reported the Wall Street Journal.
US DELISTING THREATS
Besides China’s crackdown, the US trump administration has been increasing pressure to delist Chinese companies. Both the State Department and the Department of Defence have pushed for this ban, citing these companies' ties to China's military and security services.
Thus, there are many uncertainties moving forward and investors ought to be cautious before considering buying a stake into Alibaba. Potential escalations of geo-political tension between US and China will negatively impact global trade and hence, affect Alibaba’s core commerce revenue stream.
IGNORE THE NOISE AND FOCUS ON THE GROWTH RESULTS
Firstly, Alibaba files financial statements with the U.S. Securities and Exchange Commission (SEC) and does so in accordance with generally accepted accounting principles (GAAP).
Secondly, Alibaba is not included in the official US treasury blacklist document. The delisting of the 3 largest china telcos shows us that the US is wary of Chinese state-owned companies instead of private conglomerates.
Lastly, if we compare the trading volume of Alibaba. Stock and the Chinese telcos, it is evident that the average volume for Alibaba’ stock is 25 times that of Chinese telcos. Such huge trading volume allows many people to make money from it.
While these issues are valid cause for concern, investors must realise none of these market concerns have anything to do with Alibaba’s underlying business, which happens to be booming.
It’s unlikely these concerns will ultimately have any impact on Alibaba’s stock price five or 10 years down the road.
COMPETITION IN ECOMMERCE
Politics aside, one may argue that Alibaba faces cut-throat competition locally and overseas. For instance, some of Alibaba’s main rivals are JD.com, Amazon. The list of competitors are endless.
However, Alibaba’s core commerce has been growing at a phenomenal rate year over year. In addition, its internet business hasn’t been complacent and continually innovate to serve its customers better. Taobao, T-mall, Lazada, etc has a robust interface where it incentivises consumers to give review and feedback. Feedbacks on consumer goods breed reputation and trust.
This makes its platform stand out from the rest, as consumers feel that they can trust Alibaba in providing a seamless shopping experience. In addition they have this live Q&A sessions between buyers and sellers to provide clearer in-depth knowledge about the product, boosting sales and confidence in shopping.
One particular case study I would like to pull up is by Motley Fool where it states JD's business model is much more capital-intensive than Alibaba's but that insulates its shoppers from counterfeit products. That's why J isn't on the U.S. Trade Representative's "notorious markets" list for counterfeit marketplaces -- while Taobao and Pinduoduo are.
While it may be true, it is an outdated article. This is because Alibaba has partnered with Richemont a company that owns several of the world's leading companies in the field of luxury goods, with particular strengths in jewellery, watches and writing instruments.
In addition, Alibaba does not need to keep any inventory compared to JD and hence profit margins will be significantly higher than that of its competitors.
CONCLUSIONS OF ALIBABA STOCK
Since the cancellation of Ant’s IPO and all the anti-trust by US and China regulators, Alibaba’s stock price took a beating and fell close to 30%.
Alibaba stock is holding a Forward P/E ratio of 24.1. For comparison, its industry has an average Forward P/E of 51.04 which means Alibaba is trading at a discount to it's peers.
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2 https://www.businesstimes.com.sg/banking-finance/china-president-xi-jinping-decided-to-halt-ant-groups-ipo- report#:~:text=CHINA'S%20President%20Xi%20Jinping%20personally,the%20knowledge%20of%20the%20matter.
3 https://www.wsj.com/articles/jack-ma-makes-ant-offer-to-placate-chinese-regulators-116084796294 https://www.fool.com/investing/2021/01/06/us-may-include-alibaba-tencent-in-china-stock- ban/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
6 https://sg.finance.yahoo.com/news/lack-of-political-consensus-limits-bidens-options-on-china-council-on- foreign-relations-president-205131189.html
7 https://www.investopedia.com/articles/investing/121714/how-does-alibaba-make-money-simple-guide.asp 8 https://www.treasury.gov/ofac/downloads/ccmc/ns-ccmc_list.pdf
9 https://www.fool.com/investing/2021/01/12/forget-alibaba-chinese-tech-stock-better-jd- com/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
10 https://www.reuters.com/article/us-richemont-results/richemont-bets-big-on-china-partnering-alibaba-to-invest-in-farfetch- idUSKBN27M0N0
Last updated on April 6th, 2021 at 02:32 pm