Alibaba (BABA.US) is the Chinese internet behemoth with presence in e-commerce, cloud, search engines and payments sectors, among others. While the company continues to show strong sales growth and rising profits, Alibaba has been out of investors' favour so far this year, losing a quarter of its value year-to-date. Poor performance of the share price can be reasoned with Chinese authorities increasing crackdown on domestic tech companies, and Alibaba is one of the victims. Let's take a closer look at the situation.
Chinese crackdown on tech companies
Start investing today or test a free demo
Open account Try demo Download mobile app Download mobile appChinese authorities launched a number of new laws and regulations targeting tech companies over the past few months. Regulations touched numerous branches of the broad tech sector, and Alibaba was no exception. New anti-monopoly regulations were passed and an anti-monopoly probe was opened into the company in late-2020. Chinese regulators imposed a $2.8 billion fine on Alibaba in April 2021. Alibaba also faces potentially higher regulatory costs going forward due to new data security policies required by the Chinese authorities. Companies not complying with those laws are subject to fines but some commentators say that compliance with those regulations is in some cases out of control of the targeted companies.
Is it over?
After months of passing new regulations, investors are wondering - is it over? It is hard to say. New regulations were often announced unexpectedly and it creates risk that more bad news may be coming for Alibaba. However, some uplifting news came from China today. One of the state-backed media outlets reported that Alibaba has agreed to spend $15.5 billion (100 billion yuan) on "common prosperity" by 2025. Investment in "common prosperity" means investing in order to narrow the wealth gap in China. Such a move can be a result of the agreement with the Chinese government. If this is so, Alibaba may be spared from more scrutiny.
There is one more source of concern when it comes to Chinese stocks in general. Wall Street Journal reported last week that authorities in China are considering whether to ban data-heavy Chinese companies from listing on the US stock exchanges. WSJ says that laws could be implemented as soon as Q4 2021. However, the move was not confirmed by China yet and it is not the first time such news surfaced therefore it could be just fake news.
How does stock compare to peers?
YTD returns and stock multiples for Alibaba and its main competitors in e-commerce business. Data as of September 1, 2021. Source: Bloomberg, XTB
Share price of Alibaba (BABA.US) has dropped by around 25% year-to-date amid increased regulatory scrutiny. This is a much bigger drop than in case of the HSCEI index (CHNComp), which trades 13% lower compared to 2020 close. However, is the lacklustre performance a feature of Chinese stocks this year? Not necessarily. E-commerce companies from the United States - like Amazon or Ebay - are also trading lower year-to-date. Ebay took an even bigger hit than Alibaba, trading 34% lower year-to-date. In spite of a strong sell-off, Alibaba stock looks to be valued in-line with its competitors, especially when taking a look at P/S or P/BV ratios.
While the Chinese HSCEI index (CHNComp, blue overlay) and US Nasdaq-100 (US100, yellow overlay) moved more or less in tandem at the beginning of the year, both indices disconnected in April 2021. Alibaba (BABA.US) followed the Chinese index and reached a 2-year low in August. Source: xStation5
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.
