Alibaba’s (BABA -1.77%) stock has been volatile. It peaked at $317 per share, fell to a low of $58 a few months ago, and recovered to $120 early this year.
But as of this writing, the stock has fallen back to around $90. The bulls might be excited with the opportunity to buy this high-quality company on the cheap. But before jumping into the stock, let’s go through both sides of the coin of investing in Alibaba.
The bull case
Foreign investors were shocked (and perplexed) when the Chinese government decided to crack down on its national champion Alibaba and its various subsidiaries like Ant Group in the last few years.
While no investors enjoy seeing their company face a government crackdown, the event signaled to us an important fact — that Alibaba owns some of the most dominant franchises in China.
Take e-commerce, for example. Alibaba served around 900 million customers in the fiscal year 2022 (ended March 31, 2022 ). That year, it enabled about 8 trillion yuan (more than a trillion dollars) worth of transactions on its Taobao and Tmall platforms. In that year, Amazon achieved around $600 billion.
Alibaba’s success in the retail industry sparks further expansion in related sectors like logistics, cloud computing, fintech, and others. For example, Alibaba Cloud is the most significant player in China, with around 37% market share in 2021. Alibaba’s fintech associate, Ant Group, powered over half of China’s payment industry while leading in other areas like lending and asset management.
Alibaba also owns some younger (but with great potential) ventures like Cainiao Logistics, overseas e-commerce, and local consumer services. These businesses could grow into further giants as they operate in large and growing markets.
It is also important to note that Alibaba has a solid balance sheet ($61 billion in cash net of borrowings ) and strong cash-flow-generation capabilities — it generated $20 billion in free cash flow in the first nine months of the fiscal year 2023. With these firepowers, the tech giant can afford to invest heavily in sustaining and growing its leadership in various businesses.
Since its IPO in 2014, Alibaba has been growing revenue at a rapid rate of more than 30% (even 50% in some years). While its recent growth has been disappointing (more on this in the next section), the company has the necessary ingredients — solid businesses and plentiful resources — to keep growing at respected rates for years to come.
The bear case
Alibaba might own a few good businesses, but there are still risks that investors cannot ignore.
On one level, investors must face the inherent risks of investing in Chinese companies amid the significant differences in market dynamics, culture, and regulatory regimes. Investors must understand these areas well to make sound investment decisions.
On top of that, the biggest hurdle for investing in China comes from the political risks. The crackdown on technology companies — including Alibaba and Tencent — that has been ongoing over the last two years is an excellent example of what the Chinese government could (and would) do to keep the country under its tight grip.
On its own, Alibaba is also facing numerous challenges. Topping the list is the slowdown in growth in the last few quarters. For perspective, revenue grew 41% in fiscal 2021, 19% in fiscal 2022, and just 2% in the first nine months of the fiscal year 2023. Alibaba’s already gigantic size, competition from Pinduoduo and Douying, and COVID-19 lockdowns impacted the company’s recent performance.
On the one hand, the bulls might argue that growth would again pick up over the longer term, given the above-mentioned opportunities. Yet, the bears might be concerned that Alibaba might have passed its prime and that it’s unlikely to return to its old days of hypergrowth mode.
So is Alibaba stock a buy?
The bulls and the bears have good reasons to hold onto their stances.
For investors willing to tolerate some volatility, it makes sense to buy Alibaba stock today. It owns some of the best businesses in China, and the stock is cheap — it has a price-to-sales (P/S) ratio of 1.7 compared to its five-year average of 6.5.
But for those uncomfortable with the associated China-specific risks or unwilling to tolerate the company-specific challenges described above, it’s best to avoid the stock.