The Fall of Alibaba?

Alibaba Group Holding Ltd. (NYSE: BABA) is undoubtedly one of the defining stories of China’s ascent to global economic dominance. The Chinese e-commerce firm was started in Hangzhou in 1999 and has since grown exponentially, reaching a staggering market capitalisation of 842 billion USD in the later part of 2020. Since then, Alibaba stock has tumbled, pricing in at 125.44 USD per share after markets closed on February 10th. This price is the result of an almost 60% fall from glory in little over a year. As a result, the company’s stock is looking more affordable than ever and has received endorsement from analysts at Citi Group, Goldman Sachs, and J.P. Morgan over the last month. Although many investors see this as an unmissable opportunity to buy into Alibaba, the downtrodden giant’s problems are external and potentially inescapable in the long term.

Alibaba has come to be seen as a microcosm of Chinese technological and economic advancement. Indeed, the story of its founder, Jack Ma, is one of many rags-to-riches success stories birthed by the country’s economic liberalisation over the past fifty years. Ma was born in Hangzhou in 1964 and came of age as his country tentatively reopened to the world following the death of Chairman Mao in 1976. After a visit to the US in the early 1990s, Ma became fascinated with the internet and, upon returning to Hangzhou, began to experiment with its implementation in Chinese markets. In 1999, after several failed start-ups, Ma set up Alibaba with eighteen friends. The company quickly became a household name and has since been dubbed ‘the Amazon of China’. Alibaba eventually went public on US markets in 2014, raising 25 million USD and shattering the record for the largest ever IPO.

Today, Alibaba operates in four main areas: e-commerce, cloud computing and data storage, digital media, and entertainment. The company has often been seen as a stable, long-term growth pick, boasting of consistently rising earnings per share, well managed debt, and strong earnings growth (41% year-over-year in 2021). Now, with its price nearing all-time lows, many investors are scrambling for a chance to own the company’s stock. This sentiment is ostensibly reflected at an institutional level; ‘buy’ ratings have been affirmed by analysts at Goldman Sachs, J.P. Morgan, and Citi Group this month, predicting a price growth of 60% on average.

However, analyst predictions are often claims over the coming twelve-month period and traditional valuation metrics lose much of their meaning when a company faces looming external constraints. Undoubtedly, Alibaba, alike many other Chinese technology firms, finds itself in such a position of late. As China’s economic growth has, predictably, slowed, the Chinese government is facing new questions of legitimacy. No longer can the ruling Communist Party of China (CPC) justify autocracy in terms of economic growth and rapidly increasing quality of life. In the struggle to remain in control of the country’s newly liberalised economy, Beijing is turning to the unwanted remnants of the economic boom. In the eyes of the CPC, the country’s technology giants have gained an unacceptable amount of wealth, power over the people and, perhaps more importantly, power over their data. Not only this, but they have largely fallen in line with the west – they conduct business with western companies, mimic their historical strategies and growth plans, and trade on western stock exchanges. Indeed, many Chinese tech moguls are starting to publicly endorse American-style free market systems.

Jack Ma is no exception. After Ma spoke out against Chinese financial regulation in a speech in Shanghai last year, the IPO of Alibaba’s FinTech affiliate company, Ant Group, was cancelled, and Ma was called in to Beijing for “regulatory interviews”. Over the following three months, he was seldom seen in public and the CPC ramped up their regulatory assault on Alibaba. The Chinese government have mandated opt-out clauses in data collection algorithms used by the company, ordered all private firms to move their data to state-backed cloud systems and are even entering the market in the digital payment space. Moreover, there has been indication from Chinese lawmakers that further investigations into Alibaba will take place over the coming years. Beijing’s message is clear and applies to China’s burgeoning technology industry as a whole – nobody is bigger than the CPC and the private sector would be wise to remember that.  Investors should not be too eager to buy the Alibaba dip. After the correction seen in the markets early this year, many technology stocks are looking attractive right now. Undoubtedly, Alibaba has a history of strong leadership, financial prudence, and solid growth. But investors should ask themselves whether the technology giant’s slump is akin to that seen across the industry as a whole, or whether there is something far more threatening at its heart. Undoubtedly, the CPC’s interference in the market and investigations into Alibaba’s practices have been damaging for the company, and it does not seem likely that this will let up any time soon. Alibaba’s financial results for the last quarter of 2021 will be released on February 24th, a key date for investors and policymakers alike.

Analyst: Alex Mortier

Sector Head: Robert Armstrong-Jones