Unpacking The Drama at Alibaba

Listen to this post

In August, I promised to alert you if and when Alibaba Group (BABA) stock returned to the Green Zone in TradeSmith Finance.

However, so much time has now passed that I felt it was essential to revisit the situation. Alibaba is still in the Red Zone. It continues to experience negative momentum.

Even though certain institutional investors around the globe are scooping up the stock, it might be a value trap — at least for now. So today, I want to dive back into the challenges facing Alibaba as we move deeper into the earnings season.

BABA Blues

Shares of Alibaba Group hit a 52-week low of $138.43 per share on Oct. 4.

Concerns about global supply chains, government crackdowns, energy shortages, and more had pushed Alibaba stock down from an all-time high of $319.32 in October 2020.

Naturally, the question for investors over the last year has been, “How low can it go?”

As the stock plunged from that all-time high to the recent lows, analysts repeatedly predicted that the stock had hit a bottom. Some said $250. Others suggested the resistance point at $200. Some even thought it had reached its bottom at $175.

But the stock just kept falling… all the way down to that $138.43 level.

We didn’t speculate or try to catch a “falling knife.” Instead, we decided it was best to follow our rules at TradeSmith Finance.

Alibaba stock is currently trading at $172 per share. And if you are a long-term investor in the stock, you’d still be a very far way off from the trailing stop executed in TradeSmith Finance on Dec. 24, 2020, at $229.56.

How and why did the stock fall so far past its trailing stop?

These so-called experts underestimated the market’s reaction to the Chinese government’s crackdown on the technology sector. They also underestimated broader weakness in the Chinese economy, which recently registered quarterly growth of just 4.9%. Moreover, the nation is experiencing ongoing economic challenges due to weak lending conditions, high energy costs, and supply chain bottlenecks. Those macroeconomic woes certainly softened expectations for Alibaba, which is the nation’s largest e-commerce company.

But on the micro level, there was no shortage of people concerned about the health and well-being of the company’s founder, Jack Ma, who mysteriously disappeared from public life after he criticized Chinese regulators last year over the suspension of Ant Group’s initial public offering (IPO).

According to Reuters, Ma was recently seen in Hong Kong, despite rumors that officials had forbidden him to leave Mainland China. Such reports indicated that Ma’s relationship with Chinese leaders, who continue to advance “common prosperity” policies, has improved in the wake of his criticism.

Investors have taken Ma’s travels positively. However, there remains some doubt about the trip’s intentions and Beijing’s willingness to let him travel. When China is cracking down on wealthy individuals and so-called “monopolies,” critics argue that the Chinese Communist Party is only allowing Ma to travel to give the impression that it is not as draconian as recent reports suggest.

Opportunities for Alibaba

However, I don’t want to only focus on the negative political conditions. Given that this company could overcome its challenges, there are ample opportunities for it in the future.

The recent downturn prompted one of the world’s best-known value investors to back up the truck and buy the stock. Berkshire Hathaway vice chairman Charlie Munger reportedly purchased a significant amount of BABA stock at recent levels.

The purchase coincides with several potential catalysts for Alibaba in the year ahead.

The company was recently named a “Visionary” in the 2021 Gartner Magic Quadrant for Cloud Infrastructure and Platform Services. This is the first time that the company has achieved this distinction and positioned itself as a strong competitor against other cloud giants like Microsoft and Amazon.

Meanwhile, the company continues to expand its online marketplace to small businesses and new avenues for consumer-to-consumer sales. Alibaba is also working on a new mapping service unit that might redefine the nation’s taxi industry.

At a time when China has cracked down on ride-sharing giant DiDi Global, Alibaba could emerge from this period of regulatory crackdowns as a new leader in this multibillion-dollar industry.

New Risks for BABA

While BABA has bounced nearly 24% over the last few weeks, the question is how sustainable this rally will be. Alibaba still faces a significant risk in the months and years ahead.

China’s central bank recently announced that the Chinese Communist Party plans to regulate monopolies further. The government says it wants to guarantee fair competition in the economy and protect consumer data. However, many skeptics argue that the government’s real motivation behind these regulations is that it doesn’t want any competition from a monopoly on social power.

As a result, the next target for China will likely be financial technology companies, which will face similar scrutiny on capital requirements to traditional banks and other institutions. The ongoing crackdown will continue to generate skepticism among U.S. and other Western investors who are worried about the security of their investment. Given Alibaba’s extensive reach into the financial sector (and the retail sector), the scrutiny by government officials is hardly over.

The stock has experienced a nice bounce over the last two weeks, but we do not know how sustainable it is at the moment. We will continue to monitor this stock, and I will let you know when the stock enters both the Green Zone and positive momentum conditions.

We’ll be back to talk more about tech stocks and earnings in the days ahead.