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 plunged by 68% over the past three years, the narrative of a triumphant rebound from the pandemic or a potentially lucrative breakup plan failing to materialize, and a Beijing crackdown inflicting damage on the tech sector and the company’s stock performance.
Although the aforementioned theses haven’t materialized, Alibaba still retains hope. Let’s delve into the reasons that support the decision to buy, sell, or hold the Chinese e-commerce stock today.
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Why Consider Buying Alibaba Stock
Alibaba stock presents a compelling case for purchase. Initially, the company’s revenue growth is picking up speed.
With revenue surging by 9% in its most recent quarter, and witnessing expanding margins alongside a 34% increase in operating income, Alibaba continues to demonstrate growth in a tepid Chinese economy, despite Pinduoduo-parent PDD Holdings acquiring market share in China’s e-commerce sector.
The stock is also attractively priced in historical terms and continues to yield significant profits. With a price-to-earnings ratio of less than 10, there’s potential for ample upside if consistent growth can be showcased. Additionally, there’s room for the stock to expand if investors reevaluate China, resulting in a reduction of the discount applied to most Chinese stocks.
Alibaba also brought cheer to investors with its intention to carve out some of its secondary businesses beyond its core e-commerce operation. While this plan suffered a setback when the company announced its decision not to spin off its cloud division due to U.S. chip export restrictions, it remains committed to spinning off businesses such as its logistics segment and digital entertainment, which could unlock value for investors.
Reasons to Sell Alibaba Stock
The primary peril confronting Alibaba stock revolves around the uncertainty surrounding the Chinese economy and the regulatory landscape, as the recent crackdown has inflicted substantial pressure on the company, culminating in a multibillion-dollar anti-monopoly fine and various divestitures in an effort to appease Beijing’s concerns regarding the outsized power of Chinese tech giants.
Economic indicators emanating from China continue to portray weakness, with the December Purchasing Managers Index signaling a marginal decrease in factory activity, underscoring the elusive nature of a potential rebound.
Furthermore, the World Bank anticipates a deceleration in China’s GDP by 2024, as the country grapples with a slew of challenges including diminishing property values, burgeoning youth unemployment, geopolitical tensions with the U.S. over semiconductor technology, and a floundering manufacturing sector.
Given Alibaba’s subdued growth in its recent quarters, a business recovery is contingent upon an invigorated Chinese economy.
Rationale for Holding Alibaba Stock
A major impetus to consider holding Alibaba rests in the ongoing flux within the business. While the company’s spinoff plan encountered a setback due to the newfound U.S. chip export regulations, raising capital could potentially buoy the stock and, in all likelihood, be well received by Chinese regulators.
Alibaba also boasts a new CEO. Eddie Wu, who took over from Daniel Zhang in September, has also assumed leadership of Alibaba’s core e-commerce business comprising Taobao and Tmall.
Wu is keen on sharpening the company’s focus on artificial intelligence, aiming to usher in a younger management cadre. He has also articulated his intent to prioritize a user-centric approach.
Alibaba will also need to defend itself against the burgeoning competition from Pinduoduo and Douyin, China’s TikTok, which has cultivated a substantial shopping segment, necessitating vigilance. These fast-growing firms have encroached upon Alibaba’s market share in recent years.
While Alibaba harbors the potential for reinvention, investors might be inclined to retain the stock until unequivocal signs of a turnaround surface.
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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.