Alibaba: A Play On The Prosperity And Digitization Of The Region

Alibaba: A Play On The Prosperity And Digitization Of The Region


Factors that have been pressuring Alibaba stock will likely continue to do so for a while. Volatility will remain elevated over the coming quarters if not years.

I’m a buyer nevertheless as I see the valuation as extremely attractive.

I see further upside as I don’t think that the growth prospects are reflected in consensus estimates which makes forward multiples even cheaper.

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I’m a buyer of Alibaba Group ( BABA ) stock with a decade-long investment horizon. I fully expect the near term to be shaky. The things that have been pressuring the stock will continue to do so for a while. The regulatory pressures will likely last until the 20th National Congress of the CCP in the back end of 2022. Slowing Chinese consumer spending may stagnate until it comes back in force. The margin pressures from decreased Chinese e-commerce demand will shrink further from increased investments. Investors looking for relatively quick returns should look elsewhere.

The long-term picture, however, is bright as ever in my opinion. The company benefits from several secular tailwinds. The new verticals and new geographies should provide years of growth ahead. The CCP has a solid, albeit harsh, plan for Chinese prosperity which will benefit Alibaba.

The valuation is extremely supportive and consensus revenue estimates are low in my opinion. These two factors push me to buy the stock despite the near-term risks as I see the stock as a cheap play on the development and digitization of the consumer in the region. Alibaba’s Recent Headwinds Will Likely Continue for Quarters to Come

Over the past year, Alibaba has underperformed most major benchmarks. The stock fell 52% while KraneShares CSI China Internet ETF ( KWEB ) fell dropped 41%, iShares MSCI China ETF ( MCHI ) fell 20% versus a 26% rise in the S&P 500; the price chart is below. The stock was plagued by a quadfecta of headwinds of regulatory pressures, a cyclical slowdown in Chinese discretionary spending, and increased competition in Alibaba’s core operations necessitating heavy investment. These issues, although mostly (not fully) transitory over the long-term, should continue to pressure results. Despite my belief in the long-term value of Alibaba, I fully expect negative reactions to result over the coming quarters. Alibaba was Penalized from its Exposure to Chinese Discretionary Spending; Long-Term Picture is Different

Alibaba’s e-commerce platform, much like all non-essential retail, is highly correlated to consumer discretionary spending. The Chinese consumer has reduced spending recently due to future uncertainties. The first hit came from the pandemic. The Chinese consumer is worried due to uncertainties posed by the virus . Then the real estate sector leverage came into focus triggered by the Evergrande debacle. Home prices are seeing declines unseen in years and this is a big issue for the consumer as property accounts for 40% of Chinese household assets . China’s energy crisis added fuel to the fire. All of this was met with reduced spending from a government that is trying to engineer a soft landing. All these factors combined to reduce Alibaba’s customer management revenue (CMR) down to a YoY growth rate of 3% in the recent quarter down from 14% the prior quarter and below 6 to 8% estimates which were recently reduced.

Despite my belief that all of these worries will fade over time, none will clear over the near term. Pandemic continues to linger with some countries experiencing their biggest waves yet. Housing prices may take a deeper dive before the deleveraging in the sector is complete. The Chinese government is unlikely to boost spending over the near term. Alibaba is unlikely to see an upside catalyst soon as its core business cannot truly prosper without a confident consumer.

I do believe that these issues are transitory in nature and that the Chinese consumer will gain its strength back. I believe that the pandemic won’t change consumer behavior over the long- term. I’m basing this view on the increased retail activity whenever and wherever case counts seem to recede. Restaurants, bars, and shops seem inversely correlated to case counts. The Chinese consumer, much like consumers elsewhere, will bounce back.

China’s real estate sector has bigger issues than just leverage. There is an oversupply in Chinese housing where a lot of properties are purchased as an investment . The government wants to change this phenomenon and increase housing affordability as part of its common prosperity goals. Reducing leverage is also a key priority for the Chinese government. Thus, the most straightforward […]

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