BABA Stock Faces Unknown Risks, But Should Climb Over the Long-Term

The consensus around Alibaba (NYSE:BABA) stock is that it’s too good of a deal to pass up now. 

Source: Kevin Chen Photography / Shutterstock.com

The bulls believe that continued regulatory pressure on Chinese tech firms by the country’s government will ease sooner or later. And when that happens, Alibaba will rebound, they contend. 

Analysts’ estimates for Alibaba reflect the same sentiment. Of the 57 analysts who currently cover the stock, 48 have a “buy” rating on it. That strongly suggests that a bearish view simply doesn’t make sense in the longer term when it comes to Alibaba. 

The analysts’ ratings also indicate that there’s a lot of money to be made by simply buying BABA stock now while China’s hardline stance remains in place. After all, the analysts’ average price target for the stock is $286.80. But amid the pressure from Beijing, the shares are trading below $200 this morning. 

Bulls recommend buying the shares now and expect them to  approach the $270 range early next year. 

While I agree with that thesis for the most part,  I’m still worried about the impact of China’s increasingly tough regulatory environment on BABA stock. 

DiDi May Have Put All Chinese Tech Firms Under the Microscope

Given DiDi Global’s (NYSE:DIDI) recent actions during its IPO.  I believe Beijing may have more scrutiny in store for  China’s tech sector.

A recent article in the Wall Street Journal strongly suggests that DiDi may have tried to trick Chinese regulators ahead of its June 30 IPO listing in the U.S. 

DiDi looks to have simply ignored its China-based cyber watchdog and may have lied to the regulator. I’m not going to launch into a blow-by-blow explanation of the saga, but Beijing is likely incensed at Didi. 

I believe that Beijing might ramp up pressure even further on Chinese tech companies. The government has already hit Alibaba with a $2.8 billion fine in April. That fine was for anti-competitive behavior. But it’s easy to imagine Beijing penalizing all Chinese tech firms as a result of DiDi’s transgressions. 

 The latest debacle could also galvanize the U.S. administration to be stricter when it comes to delisting Chinese stocks on U.S. exchanges.  

But overall, assuming Alibaba avoids further trouble, there are multiple reasons to buy its shares now. 

BABA Stock Is Cheap 

Investors have long compared Alibaba to Amazon (NASDAQ:AMZN). Although there are obvious differences between the companies’ reliance on wholesale and retail operations, the comparison largely holds up. 

And that means that Alibaba is relatively cheap, since it carries a P/E ratio of 26.83, while Amazon’s P/E ratio is a much higher 69.10. 

Alibaba has also shown that it can continue to grow despite all of the regulatory and pandemic headwinds that it’s faced. 

Alibaba’s revenues increased 64% in its fourth quarter that ended in March, while its active user base climbed 11.7% YOY . That data indicates that the company is deriving increasing revenues from each of its users, on average. 

Perhaps as important for BABA stock as the company’s growth is the fact that the $2.8 billion fine is now in the past. That fine took what would have been a $1.612 billion net gain from operations in Q4 and turned it into a $1.17 billion loss. 

There are some potential headwinds in the works for Alibaba, but the worst looks to be behind the e-commerce and cloud giant. The stock’s attractive valuation should attract more investors to BABA stock,  causing, in turn, the conglomerate’s  share price to advance going forward. 

On the date of publication, Alex Sirois 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.

View more information: https://investorplace.com/2021/07/alibaba-stock-faces-risks-but-it-should-climb-over-the-long-term/

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