A common concern from American investors when discussing China is whether or not Alibaba Group Holding, the e-commerce giant that has been battered in recent years, is safe to acquire.
An all-time low of $317 was reached in March, and Alibaba’s stock (NYSE: BABA) is still down by 10% this year after plunging 74% from its top in September 2020 at that low point. Barron’s has been wary for a long time now, while others have leaped into the market.
Soon, expect further volatility. In the end, Alibaba serves as an excellent proxy for China, but there are several concerns. It’s up to the country’s leaders to stabilize the economy and deal with Covid. Delistings and possibly larger investment restrictions in the United States loom large for Chinese corporations. Xi Jinping’s third term is anticipated to cement power in China this autumn, which raises worries about the future of Alibaba and other Chinese enterprises.
The extent of additional losses may be constrained. Currently, the stock is trading at $106.45 after rebounding 30 percent in the last month due to China’s policymakers’ desire to stabilize the economy.
While de-emphasizing the internet sector, which used to dominate portfolios of emerging market managers, they still expect Alibaba to remain dominant and the go-to spot for anyone trying to sell to Chinese consumers. These managers are looking for bargains in software, financials, or renewables companies in China.
Even if they are aware of the dangers, value managers are rushing in. Some of these risks are taken into consideration by the manager of the Oakmark International Fund, David Herro, by decreasing the multiples he is ready to pay for Chinese firms. In addition, he predicts a cost of equity close to 14 percent for Chinese enterprises, compared to 9 percent or 10 percent for a U.S. corporation.
The corporation has its share of difficulties. In the face of increased competition and the necessity to serve the government’s interests, Alibaba’s growth and profit margins may suffer.
A silver lining could still be in sight, though. Fund managers have expressed concerns about Alibaba’s aggressive investments, particularly those that have no obvious road to profitability, such as group grocery shopping, according to the manager of the Pzena Emerging Markets Value Fund, Caroline Cai.
Alibaba is also decreasing expenses and becoming more efficient, and some of its money-losing businesses, like Lazada, are starting to show more promise, which might help offset margin pressure.
The possible rewards entice investors like Cai.
‘Do you want to be engaged when everything everyone is worried about is being discounted in the valuation?’ she wonders. A deep value investor would say yes and Cai has been making contributions to Alibaba as well as China in general.
Stocks like Alibaba have some potential catalysts in the foreseeable future. Chinese economic statistics may begin to recover from the Covid-related lockdowns in Shanghai and Beijing, and policymakers are stepping up stimulus—a stark contrast to what’s occurring in the United States.