us and china trade war

Is Alibaba A Good Investment?

With the ominous cloud of delisting hammering away at the “Amazon of China’s” stock price, is now a good time to invest in Alibaba?

Alibaba (NYSE: BABA) made its stock market debut as the biggest IPO in U.S. history in 2014. Since then, its stock price has been consistently rising year over year until last year, when the Chinese government launched investigations into the company for violating anti-monopoly rules; ultimately, Alibaba was fined nearly $3 billion. Furthermore, U.S. shareholders don’t directly own shares in the company as per Chinese regulations but rather in a variable interest entity (VIE) out of the Cayman Islands. Add to this growing U.S.-China tensions and fears of delisting, and you have the recipe for a high-risk investment; so is now a good time to invest in Alibaba?

The bull case for Alibaba

Alibaba is the biggest e-commerce company operating in the biggest e-commerce market on Earth-China. It also has irons in many other fires which include cloud computing, fintech, and digital media & entertainment. With China’s growing middle class, this company seems like a no-brainer for a long position and its financials further bolster that viewpoint. As per its last quarterly report (Q2 2022), revenue and income from operations were both up 29% and 10%, respectively, year-over-year (YoY).

The company also has an outstanding cash position with roughly $80 billion in cash on hand so it’s able to weather any storm. Right now, the stock is so cheap (13.5 times forward earnings) that Charlie Munger doubled his position in the company to comprise 20% of his Daily Journal portfolio; no doubt following Berkshire Hathaway’s tenet of “being greedy when others are fearful.” 

The bear case for Alibaba

In a word: China. The Chinese government prevented Ant Financial, a company in which Alibaba holds a 33% stake, from going public last year to underline its authority and to throw a blow to shareholder Jack Ma, who made inflammatory comments about China’s banking system at a conference earlier. That aside, Alibaba is caught between regulators in China and the U.S. as China is trying to abolish the usage of VIEs and the U.S. is requiring greater financial transparency from organizations that use the instrument. And to think that a delisting won’t hurt investors as they can just take a position in Hong Kong’s market (HKEX) doesn’t seem like a good argument as the stock decline is practically one-to-one with the NYSE right now.

So, is Alibaba a good investment?

One might be inclined to take a page from Munger’s book but I would take a very small position in the company right now and wait a few quarters to see if the delisting madness dies down before taking a deeper dive.

Quickfire round:

1. When did Alibaba go public?

September 18, 2014, with a valuation of over $20 billion

2. Where is Alibaba’s headquarters and who is its CEO?

Hangzhou, China. Daniel Zhang, as of May 2015

3. Alibaba?

Founder Jack Ma sought a word known across cultures and upon a quick interview of different people, he found his company name.

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