Not all stocks are cast from the same mold. While a select few hold the potential to soar like an Apple or Home Depot, many others flounder, risking descent into the stock market abyss, a bottomless pit of financial ruin. It’s a familiar saga of corporate euphoria ripped apart at the seams, leaving investors disillusioned and their portfolios in tatters. One such saga has unfolded for Alibaba (NYSE: BABA), infamously dubbed as “the Amazon of China.”
Challenges of Holding Alibaba Stock
Even stocks akin to Amazon encounter trials, witnessing the evisceration of their value in a bear market. In such squalid times, astute investors seize the moment and purchase at discounted valuations. However, my aversion to Alibaba isn’t rooted in market dynamics. The snag is the substantial political risk the company carries.
Despite being classified as an international stock, which is not inherently ominous, Alibaba trades via American depositary receipts (ADRs), akin to reputable stocks such as Taiwan Semiconductor Manufacturing. Even though ADRs are essentially shares in holding companies, not the enterprises themselves, they serve as stalwart stand-ins for foreign investments.
The primary rationale for steering clear of Alibaba is the unwieldy mantle of political risk that encompasses it. U.S.-China relations have undergone a tortuous deterioration, casting shareholders into a precarious maelstrom. The Security and Exchange Commission’s (SEC) 2022 ultimatum of delisting ADR companies for inadequate financial disclosures was a harrowing episode. China’s mandate for increased corporate secrecy further entwined the company in a web of opacity. The arbitrary punishment meted out by the almighty Chinese government further aggravated the conundrum, knitting an aura of $0 stocks seasoned with investor despair.
Growth and the Alibaba Predicament
Moreover, Alibaba’s stock has failed to embrace the enterprise’s growth. The profound decline insinuates that the culprits run deeper than just market sentiment.
Alibaba’s revenue surged from 127 billion renminbi ($18 billion) in fiscal 2014 to a staggering 869 billion renminbi ($127 billion) by fiscal 2023. Not to be outdone, the company hauled in 459 billion renminbi ($63 billion) in revenue and notched a 33% year-over-year ascent to 85 billion renminbi ($12 billion) in non-GAAP net income in the initial half of fiscal 2024. This sustained uptrend, despite damning sentiments, is a feat deserving acknowledgement. Despite such efflorescence, the stock languishes perilously close to its 2014 initial public offering (IPO) price. Consequently, the price-to-sales (P/S) ratio, which soared to 28 in the wake of its IPO, presently huddles around 1.4, a sad parody of its previous self. Similarly, the once lofty price-to-earnings (P/E) ratio of 60 has shriveled to a mere 9.9, a lamentable fallout owing to the turmoil besieging this stock.
Steer Clear of Alibaba Stock
Despite Alibaba’s robust expansion and rock-bottom valuation, the looming political risk renders it a toxic cocktail for most investors. While ADR arrangements traditionally invoke a sense of security, investors risk being entangled in diplomatic crossfires if the U.S. grapples with a company’s home nation. The SEC’s harrowing threat of delisting only underscores the precarious precipice on which investors teeter. The comparatively lofty valuation of a U.S.-based stock like Amazon may very well be a fair premium to evade the ominous cloud of political risks.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.