Over a one year period, the Alibaba (NYSE:BABA) share price has really struggled. A year ago it was trading at $264, but currently trades at under half that value at $122. It’s seen sharp spikes higher but always has moved with even quicker velocity lower. For example, after moving 15% higher last Monday and Tuesday, Alibaba shares haven’t managed to keep momentum going, and are in the red for the day. Is there still room to get short and profit?
Concern around China
One of the biggest reasons why BABA shares could continue to fall lower is due to the situation in China. The communist party (CCP) have spent a good part of 2021 cracking down on big tech names. As part of this, Alibaba was fined $2.8bn earlier this year by the local authority. It claimed that the business had abused it’s position in the market, breaking anti-monopoly regulations.
Whether this was justified or not can be debated for a long time. Yet one thing that we struggle to justify is the size of the fine. At $2.8bn, it represented 4% of the 2019 revenue for Alibaba. This is a huge amount, and more than just a slap on the wrist.
Pressure has also come in recent weeks following the decision of fellow tech name Didi to relist in Hong Kong (versus the US). Now this isn’t exactly the same as Alibaba, that has an ADR on the NYSE but is also listed in Hong Kong. But the association with the US is definitely enough to worry some investors.
The bottom line is that we feel the influence of China has contributed in a large part to the selling this year in BABA shares. With the situation as yet unresolved, further action from the CCP could negatively impact the share price.
Latest earnings mixed
The latest quarterly results out last month were a bit of a mixed bag in our opinion. Total revenue grew by 29% year-on-year with both China and international commerce posting double digit gains. Annual active customers also increased to 1.24bn, up 62m on the previous quarter. This is a recipe for success in the long-run. If the customer base can continue to grow, then with careful financial planning it should translate to a profit.
Unfortunately, adjusted EBITA was down 32% year-on-year. It flagged the reason for this as being investment into key strategic areas. There’s nothing wrong with investment in business for long-term gains. However, it should be noted that without this funding, EBITA was broadly flat versus last year. This is the concern for us, that if revenue and customer base is growing but EBITA isn’t, something isn’t quite right.
Clearly, time will tell as to whether the fundamental business does have value and can be profitable for investors. From our point of view, we do see likely further downward pressure on BABA shares in the short term. However, having already fallen so much, we don’t think the risk/reward makes much sense in getting short. Rather, we’d prefer to patiently wait on the sidelines and see how the situation unfolds.
AlphaPicks does not own a position in BABA. To trade shares, register here with our preferred partner, EToro.