Is This the Right Time to Invest in Alibaba?

Key Points

• New regulations have taken their toll on Alibaba's ability to withstand competition.
• The increase in competition has eroded at least some investor confidence.
• Alibaba may have to get both creative and conservative if they want to cut costs.

Global online marketplace Alibaba Group Holding Ltd. NYSE: BABA posted its most recent quarter on November 17 and the results were mixed. While some investors may have been okay with the lukewarm report, the stock took a tumble and is now 75% lower than its all-time high ($317.14 in October 2020). This has actually dragged its market capitalization down by $344 billion (since last October).

Antitrust Probe and New Regulations Slow Alibaba Profits

The fourth quarter was the beginning of a massive downward trend for Alibaba. The Chinese government launched a probe to investigate potential antitrust issues in the e-commerce company. The probe led to Alibaba receiving a record-high $2.8 billion in fines by April 2021. The Chinese government also banned Alibaba from cementing exclusive deals with merchants and issuing tighter restrictions on their promotional options, marketing campaigns and other investments.

The new regulations have taken its toll on Alibaba's ability to withstand competition from other e-commerce companies, like JD.com Inc NASDAQ: JD and Pinduoduo Holdings Inc. NASDAQ: PDD. Because Alibaba generates 100% of its profits from its retail sales — which includes both online and brick-and-mortar stores, as well as overseas marketplaces — the increase in competition has eroded at least some investor confidence. Since its smaller cloud services, digital media and various innovation initiative sectors remain unprofitable, the restrictions will continue to soften the stock.

Alibaba: Not Alone in this Struggle

Speaking of international competition, both JD.com and Pinduoduo have received moderate BUY ratings this week, just like Alibaba. Of these three, though, Pinduoduo appears to be positioned for stability. For one, PDD is the only company that has gained in value in the year, so far. PDD is up nearly 16% year to date while BABA is down 32.25%. JD is also down 25.09% while the much larger online retailer Amazon.com Inc. NASDAQ: AMZN is down more than 43.5% on the year so far.

Indeed, Amazon is currently not doing much better than its 52-week low and is also the only stock (in this list) with that is more volatile than the S&P 500 (with a beta value of 1.23). By comparison, Alibaba has a far more stable beta of 0.5; PDD has a beta of 0.59 and JD.com is even more impressive at 0.34. Similarly, Amazon and JD.com have significant upsides (60.30% and 56.10%, respectively), though they cannot compete with the 90.40% upside given to Alibaba.

What is most interesting, perhaps, is that many of the companies in this sector are posting extremely high P/E ratios. At 31.71, PDD is the closest to the stable of the stocks listed, while Amazon is more than double this, at 86.41. Alibaba has an alarming P/E ratio of 201.21 while JD.com is also more than double that, at 583.4.

All of this is to say that a “moderate-buy” rating appears to cover a wide range of data, at least in this sector. And while the rating does imply that this could be a good time for Alibaba (or any of its peers, to be honest), it could be just as smart to see how they fair during the holiday spree.

Earnings Beats Are Not Enough; Alibaba Relies on Profits

For the first half of fiscal 2023, Alibaba struggled with slow growth in both its domestic e-commerce arm as well as its cloud businesses. Indeed, earnings per share (EPS) for the first part of this year have been climbing slowly after that big drag in Q4 of 2021. As a matter of fact, the Q4 tumble plunged earnings from 16.87 in Q3 of 2021 (beating the $15.93 estimate) to only $7.95 in Q4; which, fortunately, also beat the estimate.

The first quarter of 2022 saw a big jump in EPS, meaning they managed to recover quite well from that blip, registering earnings of $11.73, more than a dollar more than the estimate. The $12.92 EPS in Q2 of 2022 was also about a buck over the consensus estimate.

Moving forward, Alibaba may have to get both creative and conservative if they want to cut costs and, eventually, turn a profit. After all, analysts now estimate that Alibaba's revenue should increase only about 5% while [adjusted] EPS should slide up 19%. While these numbers are not stellar, they are quite impressive for a company running a tight net margin of only 0.88% and trading at a value that is down more than 30% on the year, and nearly 80% below its 52-week high.

That said, take the moderate Buy rating with a grain of salt as the retail industry, as a whole, is having a hard time right now. While the investment could be worth the risk, it might also be worth waiting for the next earnings report.