Alibaba Stock Is Still Too Risky To Own

This article was written exclusively for Investing.com

On Oct. 27, 2020, Alibaba (NYSE:BABA) stock closed at an all-time high of $317.14. On Mar. 15 of this year, BABA stock ended the trading session just above $73.

In less than 17 months, shares incredibly lost more than three-quarters of their value. In the process, Alibaba shed more than $600 billion in market capitalization—a figure greater than the entire market values of all but eight companies listed in the US.

The simple narrative surrounding the extraordinary plunge is that US investors have been scared off by regulatory movements, both at home and in China.

There's some truth to that narrative, certainly. But it's not the entire truth.

Concerns about Alibaba stock center on the Alibaba business as well. And given that the regulatory risks remain elevated, there is a case that trying to time the bottom in BABA stock, or owning the stock at all, is still too risky a trade.

The Long Plunge In Alibaba Stock/h2

Regulatory fears absolutely are a key catalyst in the long decline in Alibaba stock. It's not a coincidence that the sell-off began just days before regulators took a big swipe at Alibaba.

In late October of 2020, Ant Group, of which Alibaba owned (and still owns) 33%, announced plans for its initial public offering. When the deal was priced, it was set to be the largest IPO in history. The listing promised to set a value on one of Alibaba's most valuable investments—which would, based on public market listings, be worth at least $100 billion—while also bringing in capital for growth.

But the next week, the Chinese government suspended the IPO. (Ant still hasn't gone public). BABA stock fell 8% on the news, and the pressure from both the central government and investors was just beginning.

At the end of 2020, regulators surpassing Alibaba in the total number of annual active users.

Those fundamental problems alone don't support the roughly two-thirds decline in BABA stock from 2020 highs to the current price. But they're a contributing factor. The sell-off isn't just about regulatory risks.

The Case For Caution/h2

To be sure, all is not lost for Alibaba. The business remains a powerhouse even as rivals successfully play catch-up. The Chinese central government probably doesn't want one of its flagship businesses shut out of US markets; the SEC and other US agencies don't want US investors taking billions of dollars in additional losses. There's probably room for some kind of compromise; the Alibaba story doesn't have to end in a forced breakup, a delisting, or another catastrophic outcome.

But that doesn't mean BABA stock is a buy, particularly with the 50% bounce off the lows. Regulatory risks aren't going anywhere, and for the time being the fundamental concerns are not either. And there's a real problem with focusing on the fundamentals when those fundamentals literally apply to a different company. A stock price—any stock price—should in theory be equal to the total value of future cash flows, discounted for time. Investors in Alibaba have minimal assurance that they will ever receive those cash flows.

The sell-off so far has been extraordinary, but it is for the most part explainable by real factors, not simply a panicky market overreacting to unlikely outcomes. As long as Alibaba stock represents ownership in a VIE, not a country; as long as the Chinese central government remains Communist; as long as US-China tensions remain elevated; BABA is going to be a high-risk play. With fundamental concerns undercutting the potential rewards, it's difficult to take on those risks.

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Written By: Vince Martin