Imagine for a moment that you are an American investor, but that you are not allowed to buy as an investor Amazon (NASDAQ:AMZN) but Chinese investors are. Well, that’s what Chinese investors have actually been talking about Alibaba (NYSE:BABA) and BABA stock lately.
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What do I mean? This Chinese cloud company was first listed on the New York Stock Exchange and then, shortly before the pandemic, listed in Hong Kong. So while small Chinese investors can now buy BABA shares, they have to convert their money into Hong Kong dollars to do so. Plus, regulatory pressure has messed up some of the company’s dreams on pause.
So as China cracks down on its internet companies in ways some US regulators can only dream of, Alibaba’s share has grown to dirt cheap. This company has a price/earnings ratio (P/E) of just 21.77 but is growing at a rapid pace. A company that brings more than 20% of its sales to the net income line? Sign me up!
Or maybe not yet. There’s more you should know about BABA before you buy.
BABA stock: Americans jump ship
Like I said, don’t sign up everyone yet. Why? First, that of Cathie Wood ARK Innovation (NYSEARCA:ARKK) fund recently dumped several Chinese technology stocks, citing regulatory risks.
Wood may have looked at charts showing Alibaba has fallen around $270 since its February high. Attempts to pump up BABA stock in April and June both failed. Now, the last step up is also possible. After hitting a low of $201 and reaching a close of nearly $215, the stock was set to trade lower on July 16.
Today, Alibaba has a market cap of $578 billion. That means it sells for less than 5 times the sales. It is slightly more expensive, on a price-sale basis, than Amazon. However, Amazon still takes inventory risks – and only 5% of its sales become net income. Alibaba does not hold such risks, so its financial profile is more like Facebooks (NASDAQ:FB).
So I’m not completely sold. I came from BABA in April. Now I also want to see completely clear before I dive in again.
The regulatory risks
Companies like Alibaba have long been doing things that laws prohibit here in the United States. For example, Alibaba came under scrutiny last year when merchants… put under pressure not to sell on competing platforms such as platforms JD.com (NASDAQ:JD). Meanwhile, if they sell on Amazon, sellers are still free to resell walmart (NYSE:WMT) too (and many do).
It’s like an American software company selling through the Apple (NASDAQ:AAPL) app store were not allowed to use Alphabets (NASDAQ:GOOGL) Google Play too. But this is changing. Now, Alibaba and rival Tencent (OTCMKTS:TCEHY) are moved to allow this match. The two, which together control 95% of China’s mobile payments market, are also open to the government UnionPay.
That said, China also handles internet regulation differently than the United States. That is, Chinese regulators let companies move first, but don’t hesitate to fine companies for past mistakes that weren’t “wrong” when they occurred. China, for example, followed suit Didi Global (NYSE:DIDI) – an answer to Uber (NYSE:UBER) — after it became public. This left analysts like Jim Cramer offside; never buy a Chinese Initial Public Offering (IPO) again, Cramer thundered.
The Bottom Line on BABA Stocks
Ultimately, the Chinese government wants its companies to play fair against each other so that competition can continue and not be restricted. To analysts like Charlie Munger, this makes sense. LongRiver Investments has also resumed slap on the table for BABA shares.
Sooner or later, LongRiver predicts, Alibaba will adapt to the changes in government regulations, which also become the demands of the market. “The most radical idea floated” [here] is to break down the walled gardens of China Tech into an open internet,” the company writes. Do that and Alibaba may be ready to take on the rest of the world’s cloud elite. That’s something I would buy tickets for.
At the date of publication, Dana Blankenhorn was long in AMZN, FB, AAPL and JD. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is The Big Bang of Technology: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available on the Amazon Kindle store. Follow him on Twitter @danablakenhorn.
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