By Reshma Kapadia
When discussions turn to China, one question that always pops up from U.S. investors: Is it safe yet to buy Alibaba Group Holding, the e-commerce juggernaut that has been battered over the past two years amid the country's crackdown on technology?
Alibaba's stock (ticker: BABA) fell 74% from its peak in fall 2020 at $317, to its low in March, and shares are still down 10% this year. Barron's has been cautious for a while as others have jumped in.
Volatility is likely to continue. After all, Alibaba is a popular proxy for China and a multitude of risks persist. Policy makers must steady the country's battered economy and deal with Covid. Chinese companies continue to face the prospect of U.S. delistings, and even broader U.S. investment restrictions.
But the magnitude of further declines may be limited. The stock has recouped 30% in the past month to a recent $106.45, as Chinese policy makers intent on stabilizing the economy have hit the pause on their regulatory onslaught of the internet sector.
Even emerging markets managers bargain-hunting elsewhere in China -- in software, financials, or renewable companies while de-emphasizing the internet sector that once dominated their portfolios -- expect Alibaba to remain dominant and the go-to spot for anyone trying to sell to Chinese consumers.
Value managers are jumping in, even as they acknowledge the risks. David Herro, manager of the Oakmark International Fund, accounts for some of these risks by lowering the multiples he is willing to pay for Chinese companies versus a couple of years ago. Plus, concerns about transparency and other risks means he models a cost of equity for Chinese companies close to 14%, compared with 9% or 10%, for a U.S. company.
At 14 times this year's earnings and 11.5 times 2024, Herro sees fire-sale levels. "It's probably the world's most efficient e-tailer, with the No. 1 financial services company and cloud computing businesses, generating a ton of cash," Herro says, noting the company's recent $15 billion stock buyback and $80 billion in net cash and long-term investments -- roughly a quarter of the company's market value.
The company isn't without its challenges. Alibaba faces increasing competition, and the company may need to do more in service to the government's priorities, which could crimp growth and margins.
But there could be a silver lining. The changes could push Alibaba to retrench some of the aggressive investments that fund managers have worried about, especially projects that have no clear path to profitability, like group grocery buying, according to Caroline Cai, manager of the Pzena Emerging Markets Value Fund.
Alibaba is also cutting costs, trying to become more efficient, and some of its money-losing investments like southeast Asia e-commerce platform Lazada are beginning to show more promise, potentially offsetting margin pressures.
The potential upside draws investors like Cai.
"It comes down to 'do you want to get involved when everything everyone is worried about is getting discounted in the valuation?'" she asks. For the deep value investor, the answer is yes, and Cai has been adding to Alibaba and China more broadly.
The near-term also offers some catalysts for stocks like Alibaba. China's economic data could begin to improve after the hit it took during Covid-related lockdowns in Shanghai and Beijing, and policy makers are adding stimulus -- a marked contrast to what is happening in the U.S.