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Down 50% in a Year, Alibaba Is Not a Fun Magic Carpet Ride

Shares of Alibaba Group Holding (BABA), the Chinese e-commerce giant, have fallen for three days straight. Indeed, if you pull back the camera a bit and widen the lens, they’ve been falling much longer than that — down 50% since peaking last October, when the coronavirus was still ravaging retailers all around the globe, and only China seemed to have any semblance of control over the pandemic.

And that’s why it’s such a crying shame that “China” is itself the reason Alibaba stock has been sinking of late. Perhaps made overconfident by the relative ease with which it withstood Covid-19’s assault, a few months ago China began making moves to rein in the success of companies — like Alibaba — which had performed so well throughout the crisis.

Against this backdrop, Stifel’s Scott Devitt has recently begun “taking a fresh look” at e-commerce stocks all around the globe. And while there are many stocks that he likes, the 5-star analyst has sincere reservations about Alibaba stock. Although maintaining a “buy” rating on the shares, Devitt just cut his target price on Alibaba nearly 20%, to $210 a share. (To watch Devitt’s track record, click here)

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What’s behind the caution?

As Devitt explains, this isn’t a problem with Alibaba’s business. To the contrary, “Alibaba saw impressive growth due to the pandemic that is continuing through the recovery.” The company boasts plentiful free cash flow — $25 billion over the past 12 months, even more than its reported GAAP income — and is investing this cash “in its fulfillment network, 3P seller services, and Cloud.” Sales are growing strongly — up 34% in the most recent quarter — albeit not as fast as in Q4, and likely to “moderate” further as the fiscal year progresses.

Nevertheless, Devitt warns that investors need to balance this strong business performance against “increasing regulatory concerns on Chinese industry leading companies” as the government cracks down on perceived abuses in antimonopoly regulation, data transfers, and other areas, which in the central government’s view threaten the “common prosperity” in China. Already, these regulatory offensives have scuttled a planned IPO of Alibaba subsidiary Ant Group. On Monday, The Financial Times reported that Beijing may even break up Alipay, and force it to hand over its user data to the government for use by a new state-sponsored credit agency.

Perhaps hoping to head off further demands from the government, Devitt notes that Alibaba has promised to “begin investing in a common prosperity fund.” But it really does appear that this is a story of too little, too late, as government regulators have gained too much momentum to be stopped. Ultimately, Dewitt is forced to conclude that while, objectively speaking, Alibaba stock looks undervalued, the stock remains “exposed to further regulatory risk” and will probably “face more government scrutiny” in the months ahead.

So, that’s Stifel’s view. Let’s have a look at what the rest of the Street has in mind for BABA shares. Based on 22 Buys, 1 Hold and 1 Sell, the analyst consensus rates the stock a Strong Buy. Going by the $269.18 average price target, shares are anticipated to be changing hands at ~71% premium over the next 12 months. (See BABA stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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