Alibaba Seems Attractive Following Sell-Off
Shares of Chinese tech giant Alibaba Group Holding Ltd. (NYSE:BABA) have taken a hammering over the past year. The stock has moved primarily on fears surrounding the Chinese government's crackdown on tech stocks and the lingering uncertainty of regulatory action from Beijing. The result is that the stock is now divorced from fundamentals, trading at just a couple times forward sales.
Alibaba has shed over 50% of its value in the past 12 months. Savvy investors would have anticipated the carnage when Ant Group, the financial wing of Alibaba, had its initial public offering blocked by Chinese regulators in November 2020. The company was then forced to pay a record $2.8 billion fine and divest several of its media businesses and restrict vendor relationships.
A couple of years later, the stock is still under duress. While most of these concerns seem overblown, they have created a potential opening for audacious investors.
Move into Europe
Due to a number of regulatory and political issues, Alibaba's expansion into the U.S. e-commerce industry seems like a tall order. Moreover, the company has also withdrawn its investments in India amid border tensions between China and India. That leaves Europe, where it could potentially see a more conducive environment for expansion.
The European region accounts for roughly 30% of the world's gross domestic product. Moreover, the region is still relatively early in its growth phase in e-commerce compared to mature markets such as the U.S. and China.
Perhaps the most attractive element in the region is a wide variety of regulatory practices that enable Alibaba to focus its investments in more attractive areas. The company can push into countries where it can expand its logistics footprint at a rapid clip. It already has an 85% stake in Trendyol, Turkey's second-largest e-commerce business. Moreover, Alibaba also has a massive presence in the Eastern European region.
Opportunities abound
Most of the sell-off in Alibaba's stock over the past couple of years has nothing to do with its fundamentals. However, the recent gains show that most of these headwinds can turn into tailwinds. Moreover, Chinese regulators recently signaled that the crackdown on tech companies could be nearing its end.
In its most recent earnings report, though, there were signs that the crackdown impacted Alibaba's fundamentals. Top-line growth came in at just 10%, which was attributed to slowing market conditions. Many of its peers also witnessed a slowdown, so the management team's arguments may be valid. Nevertheless, the company has grown its user base at a healthy pace, adding 42 million consumers during the quarter.
On a more somber note, the company's net income dropped 25% as it increased its investments in its e-commerce properties. Still, the company's profit margin came in at 18% during the quarter. Therefore, despite the pressures, its profit machine isn't going anywhere. On top of that, its user base continues to grow rapidly.
There is also an opportunity with its cloud business, which could be a game changer down the line. Currently, Alibaba's cloud margins are nowhere close to some of the industry's stalwarts. However, if it can get somewhat closer to some of the competition in the space, it could be looking at a massive bump in sales. Alibaba Cloud's annualized revenue base is around $12 billion, forming roughly 9% of total sales. The segment's growth rate is higher than its core commerce segment.
Takeaway
Alibaba's stock has fallen off a cliff over the past couple of years. However, the worst is over and the underlying business can start firing again with an improved economic climate. A foray into the European market could be a massive growth catalyst in the future as well. Combine that with the company's incredible cloud prospects, and you could be looking at an investment opportunity with a lot of value potential.
This article first appeared on GuruFocus.
