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What is wrong with Alibaba?

Stocks

Written by:

Zhi Rong Tan

It’s been almost two years since Alibaba peaked. As such, this is an excellent opportunity to relook at the company. A company which has taken investors on a roller coaster ride (mostly unpleasant) over the last two years and left many of us in the red.

Source: Finbox

Looking at its EV/EBITDA, the company valuation has also been on a downward trajectory, further reflecting the negative sentiment many people have toward this Chinese company. In fact, its share price is already approaching its IPO price of $68.

What a ride it would have been if you had held the stock for 8 years.

So, what’s next?!

That’s the million-dollar question now.

Over the last two years, there have been glimmers of hope that Alibaba may rebound as positive news from China emerges. However, buying the dip has become a continual exercise as the stock continues to plummet.

While considerably more relaxed, the Chinese government still maintains a tight grip on the sector, which was the primary cause of its initial downfall. Combining this with the global macroeconomic slump, China’s tight Covid policies and the uncertainty of China’s close door meetings, when will Alibaba then recover? (assuming it will one day)

While I do not profess to know what will happen, here are some activities that are already taking place which may provide you with a more up-to-date view of Alibaba.

3 key events that will affect Alibaba

1) Livestreaming is back

The first is a revitalization of live streaming.

China’s e-commerce Livestream sector has grown rapidly in recent years, paralleling the country’s online shopping economy. With approximately 660 million viewers, overall revenue from this subsector is expected to reach US$180 billion in 2022. This figure is expected to quadruple by 2023, accounting for 12% of total e-commerce sales in the country.

Source: medium

Where is the news if live streaming has always done so well? Recently, we’ve seen a resurgence of popular live streamers promoting products on e-commerce platforms.

This follows months of China’s push to further regulate the industry, which saw several prominent Livestream hosts suspend their programs due to undesirable or unlawful behaviour. Li Jiaqi, a popular live streamer, also quit broadcasting following a contentious session in which he marketed a tank-shaped dessert.

Li Jiaqi, however, made an unexpected return this month with his live streaming show on Alibaba’s live streaming platform, providing the industry with a much-needed boost. This high-profile personality began with roughly 100,000 views before skyrocketing to 50 million viewers by 9 p.m., and most of the products featured were quickly sold out, prompting the influencer to urge his audience to spend rationally (Tell me which seller would tell its audience to reduce their spending). This demonstrates how lucrative this market is for both the influencer and the e-commerce company.

Overall, this resurrection might be viewed as a positive development for e-commerce companies like Alibaba, which can leverage on Livestream to attract more customers and increase sales. With Alibaba’s Taobao Live currently accounting for the lion’s share of live streams (about 70%), this development is undeniably significant for Alibaba.

2) US-China audit deal

The listing of Chinese companies on U.S. exchanges has also been a subject of disagreement between the United States and China in their deteriorating relationship. U.S. regulators have long sought access to audit US-listed Chinese companies but have been consistently denied by China, claiming national security concerns.

However, with the latest deal last month, we are beginning to see some momentum toward resolving this dispute. For the first time, China officials are permitting U.S. regulators to review China-based accounting firms that audit these U.S.-listed Chinese corporations, of which more than 200 of them (including Alibaba) are on the list due to be expelled from the exchange in three years.

China has dispatched a team of regulatory officials to Hong Kong to support the U.S. audit inspection as of September 22, 2022. ( In my opinion, they are there perhaps not to assist but rather to keep a watch on the U.S. audit inspections.)

This is significant for Alibaba because it is one of the first companies chosen by U.S. officials for audit scrutiny. With delisting being one of the key factors influencing the selldown, if all goes well, this audit might be a catalyst for Alibaba and other Chinese firms listed in the U.S.

However, the entire inspection process will take 8 to 10 weeks. So, if there is any good news (or bad news), it will be in November, around the time of the 11.11 event, which brings us to our last point.

3) Gearing up for singles days

Singles Day (11.11) is in less than two months from now.

Singles Day is an unofficial holiday and shopping season that honors those who are not in a relationship. This holiday has been popularized by Alibaba and is currently the world’s largest physical retail and shopping day. The event has grown to roughly four times the size of America’s most important shopping days, Black Friday and Cyber Monday.

Every year, Alibaba’s sales on Singles Day would reach new highs, generating the company a lot of money. As a result, this is a noteworthy occasion to gauge the performance of the e-commerce market.

Alibaba’s gross merchandise volume on Singles’ Day from 2011 to 2021 (in billions of U.S. dollars) Source: Statista

To note, the company did achieve a new high last year, but it was the weakest increase the company has ever had, growing by only 8.45%.

This year may be the same given the current macroeconomic situation, a slowing economy, and Covid 19 restrictions.

Many analysts are not optimistic about it. But here is the thing, with low expectations, this means that the downside would be limited. On the flip side, if Alibaba has a surprise performance, beating or even maintaining its year-ago growth, investors will be rewarded handsomely.

While I cannot predict which way it will go, management’s decision to extend its presales campaign, which is likely due to the fact that sales would be reduced, could be a silver lining to the success of its 11.11 event.

Concluding Thoughts

Most, if not all, of the reasons mentioned above are non-material developments that have no direct influence on Alibaba’s bottom line, and thus are unlikely to change the fundamentals of Alibaba significantly. However, these events provide a glimpse into Alibaba’s future prospects as well as possible catalysts for the company’s stock.

Nevertheless, the whole stock market (not just Alibaba) is seeing a broad fall due to rising recessionary fears. Add this to the already tarnished reputation of Chinese stocks, it is understandable why investors would be hesitant to invest in companies like Alibaba.

Prior to this article, we would also undoubtedly already have our opinion on Alibaba, and this article is unlikely to change much. As much as we could show you the good news, there is also a lot of bad news out there, such as the Chinese property market, zero covid policy, VIE structure, and delisting, which could put you off.

You, as an investor, would then have to decide which direction your portfolio should take. Alibaba could be a once-in-a-lifetime opportunity, or it could be your worst investment ever.

To conclude, there is no such thing as a free lunch in the world.

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