This probably isn't a great time to bet on China.
With shares down a whopping 47% over the last five years, Alibaba Group (BABA 2.12%) has been dead money for long-term investors. The China-based e-commerce and technology conglomerate faces ongoing political uncertainty, market weakness, and competition from nimble rivals.
Can the behemoth company turn itself over the next five years, or is it doomed to continued 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 its stock price hitting its 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 large and powerful.
Alibaba's problem started when Chinese authorities blocked the planned initial public offering (IPO) of its fintech subsidiary, Ant Group. Over the subsequent years, both Alibaba and Ant Group have faced a series of multibillion-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 a nearly $1 billion fine against Ant Group in 2023 is widely believed to be the end of China's brutal tech crackdown. As the Chinese economy continues to struggle, the New York Times reports that its government is starting to take a more business-friendly tone and policy stance. But the damage may already be done.
Image source: Getty Images.
Through almost half a decade of unpredictable and business-unfriendly policy (including the world's longest-lasting COVID-19 lockdown), China has made itself arguably uninvestable. Multinationals like Apple and Samsung are shifting their supply chains away from the country, while others plan no future investment in its once-coveted market.
Retail investors should take note because this negative sentiment can impact Chinese stock valuations, even if operational results improve.
The next five years for Alibaba
As if the macro challenges weren't bad enough, Alibaba's core operations are also lackluster. While revenue increased by a modest 7% year over year to $30.7 billion, net income collapsed 96% to $127 million based on a drop in the value of its holdings in other publicly traded companies.
Alibaba has its fingers in so many different pies that the performance of these often unrelated equities often overshadows its core e-commerce and cloud computing businesses. Over the coming years, the company's sprawling size could lower its efficiency and management focus, causing the market to continue discounting its valuation.
While management reports that Alibaba's fourth quarter AI-related revenue grew by triple digits, this barely moved the needle in its cloud computing division, which only expanded 3% year over year (to $3.5 billion).
To be fair, 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 hamper its potential in international markets and hurt its margins by making it more expensive to train and run large language models (LLM) with less powerful and energy-efficient hardware.
Sell or avoid Alibaba stock
With a forward price-to-earnings (P/E) multiple of just 9.3, Alibaba looks cheap compared to its U.S. alternative, Amazon, which trades for 41 times earnings. Alibaba's management seems to be responding to this low valuation with buybacks -- repurchasing an eye-watering $4.8 billion worth of shares in the fourth quarter alone.
Some investors like buybacks because they reduce the number of shares outstanding, which can theoretically increase the value of 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 simply aren't willing to put money into a seemingly unpredictable and hostile Chinese market. And Alibaba's lumbering conglomeration of disjointed businesses makes it even less appealing. The company's AI prospects also look much worse than U.S. alternatives.
With all these long-term headwinds, Alibaba stock looks likely to underperform the S&P 500 over the next five years and possibly beyond.
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 has positions in and recommends Amazon and Apple. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
