Few stocks have as many competitive advantages as Alibaba (NYSE: BABA) yet have been as disappointing on the stock market.
Shares of the Chinese tech giant have fallen 68% over the past three years and have shown few signs of recovery despite hopes that the Chinese economy would rebound from the pandemic, that a breakup plan would unlock value, and that the business would recover after Beijing’s crackdown on the tech sector.
Those theses haven’t played out yet, but that doesn’t mean Alibaba is hopeless. Let’s take a look at the reasons to buy, sell, and hold the Chinese e-commerce stock today.
Image source: Getty Images.
Reasons to Consider Buying Alibaba Stock
Several factors make Alibaba stock appealing for potential buyers. Firstly, the company’s revenue growth is finally accelerating.
With a 9% rise in its most recent quarter, Alibaba demonstrated expanding margins as operating income surged by 34%. This increase in revenue signifies the company’s sustained growth even in a sluggish Chinese economy, where Pinduoduo-parent PDD Holdings has garnered significant market share in China’s e-commerce sector.
Moreover, the stock is undervalued in comparison to its historical metrics, with Alibaba continuing to generate substantial profits. At a price-to-earnings ratio of less than 10, the stock offers substantial upside potential if it can maintain consistent growth. If investors reassess China and the discount applied to most Chinese stocks diminishes, there is room for the stock to appreciate further.
Alibaba piqued investor interest with plans to spin off some of its secondary businesses beyond the core e-commerce operation. Although this plan faced a setback when the company announced it wouldn’t spin off its cloud division due to U.S. chip export restrictions, the intention to spin off businesses like its logistics segment and digital entertainment could unlock value for investors.
Reasons to Consider Selling Alibaba Stock
The biggest risk facing Alibaba stock continues to be the uncertainty surrounding the Chinese economy and the regulatory environment. Beijing’s crackdown has exerted significant pressure on Alibaba, resulting in a multibillion-dollar anti-monopoly fine and several divestitures aimed at currying favor with the government, which felt that Chinese tech giants had become overly dominant.
Economic indicators from China remain weak, with the December Purchasing Managers Index pointing to a slight decline in factory activity, indicating an elusive recovery. The World Bank also anticipates a slowdown in China’s GDP, and the country faces numerous challenges including declining property values, mounting youth unemployment, geopolitical tensions with the U.S. over semiconductor technology, and a weak manufacturing sector.
Given Alibaba’s lackluster growth in recent quarters, a revival in the business is likely contingent upon a resilient Chinese economy.
Reasons to Hold Alibaba Stock
The primary reason to retain Alibaba shares is that the company is currently in a state of transition. While the spinoff plan hit a roadblock with the new U.S. chip export regulations, raising capital could potentially invigorate the stock and likely appease Chinese regulators.
Alibaba also brought in a new CEO, Eddie Wu, who succeeded Daniel Zhang in September, assuming the top position at Alibaba’s core e-commerce business, comprising of Taobao and Tmall. Wu aims to sharpen the company’s focus on artificial intelligence and strives to assemble a younger management team. He has also emphasized prioritizing user-centric strategies.
Alibaba faces increasing competition from entities such as Pinduoduo and Douyin, China’s TikTok, which have established a significant presence in the e-commerce sector, eroding Alibaba’s market share in recent years. While Alibaba has the potential to reinvent itself, investors might want to retain the stock until clear signs of a turnaround emerge.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
