Alibaba: Attractive Company, but China Crackdown Too Risky

Alibaba (BABA) is a Chinese multinational technology company that specializes in e-commerce, retail, Internet, and technology. BABA is a perfect example of what history and the stock market have in common. Excitement, information, food for thought, historic moments, and often plenty of drama.

BABA stock is an example with lots of drama in 2021, which makes it too risky now. I am bearish on BABA stock as there is one key catalyst now that simply cannot be ignored: the Chinese government and its decision about the crackdown on Chinese technology firms. (See Analysts’ Top Stocks on TipRanks)

What Is Happening Now with China and Its Technology Sector?

A key factor that sometimes is neglected when deciding to invest in stocks is the political situation in a macroeconomic environment, especially for foreign companies that are listed in the U.S stock market. Why? The reason is about the risks related to their country of origin’s main business operations.

Alibaba, being a Chinese company listed in the U.S. stock market, has been a target of the Chinese government, making a statement that politics seem to be now in command over the business.

In 2021, although it started in late 2020, China has imposed strict regulation changes aimed at the tech sector and across several business categories, ranging from fintech, e-commerce, education, and ride-hailing to social media, music, gaming, and insurance.

How is Alibaba related to this crackdown on technology for Chinese companies? Alibaba may have been the first cause that started this whole reshape of the technology sector in China. Jack Ma, who is the co-founder and former executive chairman of the Alibaba Group, had big plans to launch an IPO for the financial technology company Ant Group. Ant Group’s controller was Jack Ma.

The Chinese government suspended Ant Group’s IPO. The reasons reported were mostly significant issues such as changes in the financial technology regulatory environment. The real answer is much more complicated.

Why China Is Cracking Down on Its Technology Giants

Several answers can be attributed to why China has decided to impose strict regulatory changes that have harmed its technology sector. Alibaba has been imposed a very large $2.8 billion fine in April 2021 for antitrust violations.

Three main reasons that fuel the decision of the Chinese government to impose a crackdown on its technology sector are an antitrust crackdown, a data security overhaul, and a check on capitalist “excess.”

For the first two reasons, I would argue that the Chinese government has a strong point. Having monopolies in several factors is bad for consumers as they are subject to higher prices paid for goods and services. Data security is also important. Personal privacy should be a priority that is often lost on social media.

I disagree though with the third factor, which is trying to harm the main cause behind the success of large corporations: capitalism, and their desire to grow, expand, become leaders in their sectors.

In reality, China has decided to reshape its strategic goals now. It favors some industries such as manufacturing, semiconductors, batteries, biotechnologies, while strictly regulating others.

Alibaba is now facing a hostile environment in which it must survive. However, the implications for Chinese public companies are now much more severe, as international investors will be reluctant to invest in high-quality stocks such as BABA.

Investors hate geopolitical risks and unpredictable outside factors, such as government intervention in an economy that wants to become the largest one globally, but lacks freedom in its business conduct. China should have a long way to become the number one global economy.

The Risks for Alibaba

From changing its business model due to restrictions on how to gather and use data such as the personal preferences of users online, Alibaba may face a severe setback.

After all, it is an e-commerce giant. Advertising and marketing are two major sources of revenue and profits for Alibaba. To the extent that regulations and restrictions will be applied to marketing agencies or even to Alibaba’s marketing team, less targeted advertising due to potential violation of privacy can lower the revenue growth of Alibaba significantly.

This will not be good news for investors. This is especially true if international investors decide to liquidate their positions in Chinese public companies due to the risks associated with this uncertainty in the Chinese technology sector.

Regulatory uncertainty and geopolitical risks in China make BABA stock too risky. Although, I did not focus on its fundamentals in this article, taking another angle, one quick note. Alibaba has a strong balance sheet, and its shares have a performance of about -32% until now in 2021. Alibaba has solid fundamentals, robust revenue growth, strong profitability, and positive strong free cash flows.

The Chinese government’s decision to reshape its entire economy and impose regulatory changes to its technology sector now makes BABA stock too risky, as this crackdown may continue in 2022.

Wall Street’s Take

Turning to Wall Street, Alibaba has a Strong Buy consensus rating, based on 19 Buys, one Hold, and one Sell rating. The average Alibaba price target of $239.84 implies 49.9% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

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