Why Alibaba Probably Hasn’t Bottomed Yet
InvestorPlace - Stock Market News, Stock Advice & Trading Tips With Beijing obviously continuing to target Alibaba and the company's cloud unit still in the red, the outlook of BABA...
Evidence strongly indicates that the Chinese government is continuing to intentionally harm Alibaba (NYSE:BABA). Meanwhile, the company's recently released third-quarter results for BABA stock were uninspiring.
Its cloud business, after existing many years, is still losing money. Given all of these points, I remain bearish on BABA stock.
Indeed, I believe that the conglomerate's shares can slide much further, even though, they're down 56% over the last year.
Beijing Is Still Going After Alibaba on Multiple Fronts
On Feb. 18, an incredible 14 agencies of the Chinese government reportedly called on food delivery platforms to reduce their prices. As a result, the shares of Alibaba, which owns Chinese food delivery company Ele.me, dropped 4.4% on the day, Seeking Alpha reported.
And Bloomberg recently reported that "Chinese authorities are asking the nation's biggest state-owned firms and banks to start a fresh round of checks on their financial exposure and other links to Ant Group," Alibaba's fintech subsidiary. It sounds like Beijing is preparing to tell government-owned companies to boycott Ant Group.
Much more ominously for Alibaba and BABA stock, Seeking Alpha contributor Bohdan Kucheriavyi last month warned that Beijing is actually starting to compete with Alibaba in multiple sectors, including the cloud and fintech.
Kucheriavyi added that in January, the Chinese government decided to crack down on algorithms used by internet ad companies. And according to the columnist, although little known to most Western investors and journalists, Alibaba gets a huge chunk of its revenue from its internet ad business which relies heavily on – you probably guessed it – algorithms.
Although the conglomerate does not usually disclose the amount of revenue it obtains from its internet ad unit, in 2017, its CFO stated that a huge 60% of its total sales were generated by the business.
The Q3 Results Were Unimpressive
Alibaba's Q2 revenue climbed 10% year-over-year to 221 billion Chinese yuan. But its bottom line declined meaningfully, as the conglomerate's earnings per American Depositary Share, excluding certain items, tumbled 23%.
Moreover, last quarter Alibaba's revenue increased by the lowest year-over-year percentage since 2014. Additionally, the conglomerate's revenue was slightly below analysts' average estimate.
Also importantly, all of Alibaba's businesses, except its main China commerce unit, lost a significant amount of money last quarter. The fact that its cloud business lost 2.34 billion Chinese yuan or $370 million, is particularly puzzling. (The cloud unit was also in the red in the previous quarter).
I remember writing about Alibaba's cloud unit around six years ago and expecting that it would become quite profitable, like the cloud units of Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN), within a year or two. It's very strange that, at the end of 2021, it was still in the red.
According to Bank of America analyst Eddie Leung, regulatory issues hurt demand for the company's cloud offerings last quarter. Perhaps he was referring to the competition that the unit is facing from the Chinese government.
Leung added that the growth of China's online retail sector is decelerating.
"The company focuses on those factors on which it still has control, such as growing its user base … and expanding logistics services for merchants and users," wrote the analyst, who rated the stock "buy" and had a $190 price target on the shares.
It's good that Alibaba is improving in some areas over which it still has control. But unfortunately, its results and BABA stock will probably continue to be badly hurt by the areas over which it does not have control.
The Bottom Line on BABA Stock
Beijing is cracking down on Alibaba's fintech subsidiary and competing with Alibaba on multiple fronts. Regulators are also reportedly targeting the conglomerate's lucrative ad unit.
And at literally any time, the Chinese government can launch new, ruinous measures targeting Alibaba. Moreover, China's e-commerce sector is decelerating and Alibaba's cloud unit was deep in the red last quarter.
Given these points, I believe that the shares can – and probably will – drop much further in the medium term and the long term.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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