In the Arabic fairy tale "Alibaba and the Forty Robbers”, a simple lumberjack named Alibaba gets access to untold riches. Unfortunately, the Chinese company of the same name has not yet been able to become a source of wealth for its investors.
Since the beginning of the year, Alibaba (BABA) shares have declined by 50%, to $115, amid negative news and vague prospects for the company.
Black stripe
Recall that the company's problems began after the release in November 2020 of the news about the suspension of the IPO of Alibaba's ”daughter", the Ant Group payment service. Many regarded this ban as a reaction of the Chinese authorities to criticism from the company's founder Jack Ma about approaches to regulating the fintech industry.
The problems did not end there. Later, Chinese state regulators launched an antitrust investigation against Alibaba, which eventually led to a fine of 18.2 billion yuan (about 13% of the company's net profit for the whole of 2020).
In addition to this, there was a risk of delisting Chinese companies on American exchanges. The Chinese authorities disapprove of the placement of Chinese shares on foreign exchanges, as, in their opinion, this could lead to the leakage of important data. On the other hand, US regulators demand greater openness from Chinese businesses and insist on publishing financial statements in accordance with IFRS. How this can end, shows the delisting of the taxi aggregator Didi, forced to leave the NYSE exchange.
Does Alibaba have any prospects after a series of such sad news? Let's try to find the answer in the company's new development strategy with a total volume of $2.4 trillion.
A new answer to old problems
What are the main theses of the presented strategy?
First of all, Alibaba's management identifies three key factors of the company's growth: foreign business, poor cities and cloud technologies.
To increase revenue, the Chinese tech giant plans to continue investing in the cloud direction of its business. The penetration of e-commerce in the richest cities of the country has reached almost 99%, so now the involvement of residents of rural areas and poor cities is in Alibaba's field of vision. Another ambitious goal is to increase the number of consumers to 2 billion people (against the current 1.2 billion). Alibaba's Southeast Asian division, online retailer Lazada, has been tasked with increasing the volume of transactions to $100 billion. Management does not forget about the ESG agenda: the company plans to become carbon neutral by 2030.
So, the company has large-scale plans, and they will require equally large-scale investments.
It can also be noted that Alibaba is betting on diversification: the cloud segment is very promising due to the massive transition of corporations to online, and business development abroad will allow the company to become less dependent on the Chinese authorities, that is, to reduce political risks.
As for increasing the penetration of e-commerce in poor cities, the prospects of this idea are still difficult to assess. Its implementation may lead to an increase in promotion costs, but at the same time the average check of a new audience may be lower than that of residents of rich cities.
The company's operating indicators over the past five years reflect significant revenue growth and a more modest rate of increase in operating and net profit indicators. This year, Alibaba's operating profit is growing by 20.97%, while net profit is only 10.34%, reflecting an increase in operating costs associated with government regulation.
Unfortunately, Alibaba has not presented any plans to improve relations with the Chinese authorities, which could clarify its future prospects. The other day, the news came out that Chinese regulatory authorities suspended the information exchange partnership with Alibaba Cloud Computing due to the untimely elimination of cybersecurity vulnerabilities. Although the news is insignificant, it once again reminds that there is no confidence in the settlement of the conflict between the state and the company yet.
Opinion
Analysts' current consensus estimates for Alibaba shares converge at $233.86, which gives an upside of 90%. But investors are in no hurry to increase their positions in the company's shares due to stricter regulation and uncertainty in the relations of the Chinese authorities with the top management of Jack Ma's brainchild.
According to analysts, the risks of investing in the company are connected precisely with politics, and not with its operational indicators, which show stable growth.