With shares down as much as 47% over the past five years, Alibaba Group (NYSE: BABA) has been dead money for long-term investors. The China-based e-commerce and technology conglomerate faces continued political uncertainty, market weakness and competition from nimble rivals.
Can the giant company turn itself around in the next five years, or is it doomed to perpetual stagnation? Let’s dig deeper.
What went wrong for Alibaba?
Like many online-focused companies, Alibaba performed well in the aftermath of the COVID-19 pandemic, with the stock price hitting an all-time high of around $313 in October 2020. Since then, its fortunes have reversed. The problem started in November 2020 when Chinese regulators began cracking down on local tech companies, fearing they had become too big and powerful.
Alibaba’s problem started when Chinese authorities blocked the plans initial public offering (IPO) of its fintech subsidiary Ant Group. In the ensuing years, both Alibaba and Ant Group have faced a series of multi-billion dollar fines over issues ranging from alleged anti-consumer practices to consumer protection and corporate governance.
Killing the golden goose
The good news is that Ant Group will be fined almost $1 billion in 2023 is generally accepted This will mean the end of China’s brutal tech crackdown. As the Chinese economy continues to struggle, the… New York Times reports that the government is beginning to adopt a more business-friendly tone and policy stance. But the damage may already have been done.
Nearly half a decade of unpredictable and business-unfriendly policies (including the world’s longest COVID-19 lockdown)China has made itself demonstrably uninvestable. Multinationals love Apple And Samsung are moving their supply chains away from the country, while others are not planning future investments in the once coveted market.
Private investors should do that pay attention because this negative sentiment could impact Chinese stock valuations even as operating performance improves.
The next five years for Alibaba
As if the macro challenges weren’t bad enough, so are Alibaba’s core businesses Also faint. While revenue rose a modest 7% year-on-year to $30.7 billion, net income fell 96% to $127 million, based on a decline in the value of stakes in other publicly traded companies.
Alibaba has its fingers in so many different pies that the performance of these often unrelated stocks often overshadows its core e-commerce and cloud computing businesses. In the coming years, the company’s ever-increasing size could reduce its efficiency and management focus, causing the market to continue to discount its valuation.
While management reports that Alibaba’s AI-related revenue grew by triple digits in the fourth quarter, this has had little impact on its cloud computing division, which grew just 3% year over year (to $3.5 billion ).
To be honest, Alibaba will undoubtedly become a leader in China’s domestic artificial intelligence (AI) market. However, U.S. export controls on the most advanced AI chips could hinder their potential in international markets and hurt margins by making them more expensive to train and operate. major language models (LLM) with less powerful and energy-efficient hardware.
Sell or avoid Alibaba stock
With a price-to-earnings ratio (P/E) of just 9.3, Alibaba looks cheap compared to its US alternative. Amazon, which trades for 41 times earnings. Alibaba’s management seems to be responding to this low valuation with repurchase — buying back an eye-watering $4.8 billion in shares in the fourth quarter only.
Some investors like buybacks because they reduce the number of shares outstanding, which can theoretically increase the value of the remaining stock units relative to future earnings. But buybacks don’t address the core reasons why Alibaba’s stock is so cheap in the first place.
Many investors Ordinary are unwilling to invest money in a seemingly unpredictable and hostile Chinese market. And Alibaba’s unwieldy conglomeration of disjointed companies makes it even less attractive. The company’s AI prospects also look much worse than US alternatives.
With all these long-term headwinds, Alibaba stock remains seems likely underperform S&P500 in the next five years and possibly beyond.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Amazon and Apple. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
Where will Alibaba stock be in 5 years? was originally published by The Motley Fool
