How risky is Jack Ma’s Alibaba today?
Chinese billionaire and founder of Alibaba Holding Group (NYSE: BABA) Jack Ma has been in the headlines lately, but for all the wrong reasons.
Ma and his financial holdings, which include significant stakes in Alibaba and Ant Group, have come under attack by the Chinese Communist Party (CCP) since delivering a controversial speech in October. At that time, at a conference in Shanghai attended by a number of Chinese political and financial bigwigs, Ma criticized the Chinese regulatory establishment, saying it was operating with a “pawnshop mentality.” “. He mocked the financial bureaucrats for their obsession with risk at the expense of innovation.
Chinese regulators were stung by the comments and reacted personally against Ma, first blocking the Ant Group’s IPO in November, which was to be the largest in the world, and then on December 24 when Chinese authorities shut down. announced an antitrust investigation into Alibaba, that sparked a sale that wiped out $ 100 billion out of the company’s market capitalization.
In recent days, it has been reported that Ma is “missing”, but various sources have confirmed that he is keeping a low profile to avoid further public scrutiny.
For investors, the key question now is what the whole intrigue around Ma means for Alibaba’s shares.
What you need to know about Jack Ma and Alibaba
Jack Ma’s reputation and fortune are inextricably linked with Alibaba, the tech giant and powerhouse in e-commerce, cloud computing and digital payments. However, investors should be aware that Ma no longer holds an official position within Alibaba other than that he is one of the 36 people who nominate the majority of the board of directors. He stepped down as president of the company in 2020 and has not been CEO since 2013.
In that sense, any pressure on Ma will not have a direct impact on Alibaba, but the CCP’s potential efforts to squeeze Alibaba, such as the antitrust investigation, could weigh on the title. Alibaba shares fell 13% on this announcement, but the stock quickly recouped some of those losses as it became clear that a breakup of the tech giant was underway. highly improbable, since it would be against China’s interests. The CCP’s decision appeared to be more about saving face after Ma’s summit speech, and the CCP was aimed at reasserting its power over a tycoon who has dominated both Chinese business and culture.
Significantly damaging Alibaba would contradict the CCP’s goals of making China the world’s largest economy and gaining global influence. Alibaba plays an important role in both respects. It has the largest e-commerce market in the world, generating over $ 1,000 billion in gross merchandise volume annually, and it is an important partner for global brands like Nike and Starbucks. Hurting Alibaba, therefore, would make China less attractive to international and multinational companies, and the government is seeking to avoid further backlash after a number of US companies moved their manufacturing operations out of China as a result of the the previous trade war.
Chinese stocks are already trading at a discount to their US counterparts amid concerns over the Communist government, which censors speeches and can clamp down on companies for what would be minor infractions in the United States. In 2018, Alibaba shares fell on trade fears the war with the United States and US-China relations remain a risk, especially amid threats to delist Chinese stocks from US stock exchanges if they fail. do not comply with certain supervisory rules. Just this Thursday, Alibaba shares fell on a report that the outgoing Trump administration may add the company to a blacklist of Chinese companies banned from U.S. investors. However, the outgoing administration will ultimately have little say in the long term.
Given Alibaba’s current valuation, however, the risks of backlash against Ma and further regulatory action against the company appear to be sufficiently considered. It is a company with a comparable level of market power and competitive advantages in China. Amazon in the United States, but it trades at a price-to-earnings ratio of just 25, significantly lower than the S&P 500 at 38 years old. In its most recent quarter, Alibaba’s revenue jumped 30% to $ 22.9 billion, and adjusted operating profit rose 44% to $ 4.4 billion, showing the enviable profit margins of the company. In addition, its cloud computing division recorded a 60% revenue growth in the quarter to reach $ 2.2 billion. Based on those numbers, Alibaba would likely be worth double or even triple what it is today if it were a US company.
A useful comparison
In 2018, Richard Liu, CEO of JD.com (NASDAQ: JD), Alibaba’s main e-commerce competitor, has been arrested on rape charges in the United States. JD stock sank over the following months, with investors fearing a potential conviction and the company’s dismantling. Tightly controlled. Like Ma, Liu retired from public appearances for several months. Eventually, prosecutors dropped the case, raising a dark cloud over Liu and JD. Since then, JD shares have posted gains of over 300%, benefiting from a wave of e-commerce growth similar to that of Alibaba.
So the lesson for Alibaba investors seems to be that there are risks associated with the CCP’s current actions against Ma and the company, but the investor response seems exaggerated. Alibaba is a leading tech giant in a country set to become the world’s largest economy over the next decade, but it is seen as a heavy company in a slow-growing industry. It sounds like a mistake. Investors may want to take advantage of the current discount.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.