When Alibaba’s market capitalisation almost slid below $300 billion in late January, it represented a symbolically humiliating moment for China’s biggest e-commerce company. In the space of just over a year, its stock price had plummeted so dramatically that the parent’s worth dropped below its fintech spin-off Ant Group, which had carried a $315 billion valuation in the run up to its aborted IPO.
In late 2020, analysts calculated that Ant Group represented about 15% of Alibaba’s overall valuation. However, the flotation’s cancellation triggered a domino effect that went far beyond a rap on the knuckles for founder Jack Ma, who’d made an ill-judged speech criticising China’s financial system in the run up to the deal.
In the following months, it became increasingly clear that Beijing’s attitude towards Alibaba was part of nothing less than a systematic overhaul of the entire country and its future trajectory. President Xi Jinping’s new “Common Prosperity” policy had a goal of making Chinese society more equitable and the internet sector looked to be a starting point for the reforms. Obviously, this had a momentous and well-reported impact on all of the country’s tech giants, which have been under investigation for monopolistic practices. Alibaba’s New York share price subsequently dropped from a peak of $317 on October 27, 2020 to a low of $111 on January 27, 2022. These days, it doesn’t take much to trigger a fresh bout of selling, as Alibaba discovered again in early February when it made an F6 filing to register one billion common shares for conversion to American Depositary Receipts (ADRs). Many investors immediately jumped to the conclusion that the company was acting at the behest of major shareholder Softbank, which might be about to divest all or part of its 24.8% stake in the group.
The Japanese conglomerate swiftly issued a clarification stating that this wasn’t the case. Financial analysts also pointed out that instead of selling shares, Softbank has been partially monetising them by purchasing prepaid forward contracts and collar trades instead.
Alibaba’s latest move is far more likely linked to its Hong Kong listed shares. If investors want to convert these back to New York-listed ADRs, then the company needs to register new ones first.
As this became clear, Alibaba’s share price started to rebound again. As WiC went to press on February 18, it was trading at $124.50.
Is the worst now priced in? At current levels, Alibaba is trading far below its five-year average in terms of forward earnings. According to S&P Global Market Intelligence data, Alibaba is now valued at 14.4 times forward earnings compared to a five-year average of 26.03 times. Yet Amazon has also witnessed a sizeable cut in valuation: its five-year average stands at 99.5 times compared to a current consensus forward valuation of 67 times. The 43 analysts who cover Alibaba have an average price target of $191, according to S&P. Most point out that while the company’s net income has been undershooting their forecasts, its revenue has surprised on the upside.
The next crucial test will be the group’s fourth quarter earnings which will be released next week on February 24. Alibaba will be the first of China’s major tech giants to report and as such, will provide a key barometer of how they’ve all fared in the face of a slowing economy and the government’s tough response to repeated Covid outbreaks.
Over the longer-term, there are concerns about the potential impacts of Beijing’s Common Prosperity policy on Alibaba’s bottom line. The group has announced plans to spend Rmb100 billion ($15.77 billion) through to 2025 to support some of these Common Prosperity initiatives. On the surface, this looks like a substantial hit to investments that could be made elsewhere. However, dig a little deeper and many of them may help to serve the bottom line.One key policy, for example, is to accelerate digitalisation across lower tier cities. This will also help to create new customers. During its investor day in December, Alibaba said that it hoped to hit the magic figure of 1 billion annual active customers by this summer. Another policy is to support SME’s overseas expansion plans. This will also help to promote Alibaba’s international e-commerce platforms such as Lazada, which recorded a 101% year-on-year increase in revenues during the third quarter.
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