Shares of Chinese e-commerce giant Alibaba (NYSE:BABA) have been in a downtrend since October 2020. Yet, a year ago, I bet few China perma-bulls expected BABA stock would be flirting with the $100 level for the first time in more than half a decade.
After losing 57% of their value in the past 12 months, shares may look cheap, but I’d argue that they’re cheap for a reason. Not only did the company post weak quarterly results last month, but it faces intense pressures in the year ahead.
Investors like to compare Alibaba to Amazon (NASDAQ:AMZN), but that is a mistake. Trading at just 12 times forward earnings, BABA stock may look like a bargain compared with AMZN, which has a forward price-to-earnings ratio of 53. But Amazon more than makes up for its valuation with strong growth and profitability. Moreover, Amazon does not face punitive regulatory headwinds.
In April, the Chinese government slapped Alibaba with a $2.75 billion antitrust fine. I’m sure the bulls hoped the record-breaking fine was the end of it, but that was not been the case. Less than five months later, Alibaba pledged $15.5 billion through 2025 to support the government’s “common prosperity” initiative. Going forward, investors will continue to foot the bill for Alibaba’s unexpected payments to the communist government.
BABA Stock Drops on Poor Quarterly Results
Alibaba reported results for its fiscal third quarter ended Dec. 31 on Feb. 24. Since then, BABA stock is down more than 11%.
The company generated $38.06 billion in revenue, a 10% increase over the same quarter a year ago. This was the slowest revenue growth recorded since the company went public in 2014.
Cloud computing revenue was up 20% year over year, while international commerce revenue increased 18% and revenue from local consumer services, which includes food delivery platform ele.me, was up 27%. But these gains were offset by a 1% decline in customer management revenue for its China commerce business, which accounts for the biggest portion of Alibaba’s revenue. Of Alibaba’s 1.28 billion annual active customers at the end of 2021, 979 million of them were in China.
Net income for the quarter fell by around 75%, due in part to a goodwill impairment. And earnings per share of $2.65 were down 23% from a year ago.
Opportunity and Risks
Although Alibaba’s growth is slowing due to increasing competition and weakening macroeconomic conditions, its e-commerce business remains strong. While sales of apparel and consumer electronics slowed, the company noted growth in home furnishings.
Alibaba needs to pivot its business away from the categories that are losing momentum and increase e-commerce penetration for necessities including fresh food and groceries.
Alibaba is building its food e-commerce business by developing a good user experience. To achieve that, it needs an integrated fulfillment system. It is relying on third-party delivery platforms like Ele.me. In addition, it caters to a broad customer base ranging from price-sensitive to affluent. To maximize profits, it will align its supply chain locations to match various consumption scenarios.
The recently launched Taobao Deals and Taocaicai also represent growth opportunities for Alibaba. Taobao Deals, which offers a direct manufacturer-to-consumer model, will drive user acquisition growth in lower-tier cities. Furthermore, it should appease the Chinese government, which encourages businesses to offer affordable goods. Together with community marketplace Taocaicai, Alibaba will drive efficiency. As it scales the businesses, investors may see profit margins to expand.
The biggest risk Alibaba faces is rising competition from startups, although this is nothing new for the company. The firm must look inward to outflank its competitors, growing its business and increasing efficiency.
Slowing consumer consumption as a result of slowing economic growth could also hurt Alibaba’s prospects.
Fair Value for BABA Stock
Trading around $100 a share, BABA stock is at a psychological inflection point. If the market continues to correct, we could very well see shares move lower.
<a href=”https://www.stockrover.com/why-stock-rover/?sa_author=diy_value_investing” target=”_blank” rel=”noopener”>Chart courtesy of Stock Rover</a>
However, according to Stock Rover, the fair value for BABA stock is $151.51. This implies upside of 50% for investors.
Shares score well on growth at 96/100. Its value score is also good at 80/100.
Alibaba is relatively cheap compared to American e-commerce stocks. Those who have been waiting on the sidelines for over a year to start a position in BABA stock have avoided big losses. Investors with a 10-year time horizon may consider buying and holding shares.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.