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Alibaba Stock Is Irresistibly Cheap. Investors Might Want to Hold Off.

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An Alibaba logistics platform.
BELGA MAG/AFP via Getty Images

At first glance, Alibaba Group Holdings might seem like a tempting deal.

Shares of the Chinese e-commerce company (ticker: 9988.Hong Kong) are cheap—and during its investor day last week, executives stressed that they see ample avenues of growth. That’s even after a brutal year of regulatory crackdowns on Alibaba’s business and a management shake-up.

But investors may still want to resist the urge to pounce. Alibaba, and other Chinese businesses, continue to face uncertainty around stock delistings, geopolitical tensions and China’s regulatory crackdowns.

As Barron’s previously reported, some money managers have recently started buying shares of Alibaba. In the past year, Alibaba went on a wild ride, losing about half its market value as it became the poster child for China’s increased scrutiny of technology companies. Chinese regulators hit Alibaba and others with antimonopoly measures and enforced tighter control over data security. Regulators have also worked to tackle inequality after rapid decades of economic growth—which was widened by sudden expansion in the internet sector.

Despite these setbacks, Alibaba shared some upbeat news in its investor briefings. Executives set a $100 billion gross merchandise value target for its southeast Asian marketplace, Lazada, and outlined a range of initiatives that would align it more closely with Beijing’s policy priorities. For example, Alibaba discussed initiatives to cater more to the roughly 600 million consumers it has in lower-tier cities that are beyond coastal areas.

Those weren’t the only updates: Alibaba said it plans to become carbon-neutral in its operations by 2030, in line with Beijing’s aggressive climate goals. The company’s top brass also discussed a more segmented shift in Alibaba’s e-commerce channel, moving from what James Lee at Mizhou described as a super-app strategy to a multi-app vertical entry—or a more segmented approach—which helps the business respond to new competition.

“Generally speaking you want to align yourself with the goals of the government. Management made some good strides here,” said Kevin Carter, founder of the Emerging Markets Internet and E-commerce (EMQQ) exchange-traded fund via email.

Analysts are largely taking a bullish view. Among those tracked by Bloomberg, 56 have Buy ratings, with five Hold ratings and just one Sell. The analysts have an average target price of $202 for Alibaba’s U.S.-listed shares, which closed at $122.10 a pop on Friday. It’s a sign of Wall Street’s continued confidence in the stock: When Alibaba began to crater a year ago, there were no Sell ratings—only two Holds and 62 Buys.

The stock at 15 times earnings is undoubtedly cheap, compared with its history and e-commerce peers like Amazon. Even bearish investors expect Alibaba to remain a dominant force in China’s economy and in Chinese consumers’ lives. However, investors are increasingly looking beyond internet stocks as expectations that Chinese policymakers could increase stimulus efforts to better manage the country’s economic slowdown draws them to China.

Last week, Alibaba executives noted the aggressive investments they are making to fund some of their new initiatives⁠—with analysts like Lee saying the payback may some time. This potential delay, coupled with China’s slowing economy and supply-chain problems, could hamper short-term growth. Beijing’s continued push to make reforms could also hammer Alibaba’s cloud and its other businesses.

There’s another issue: Alibaba has long been used as a proxy for U.S. investors’ views on China. Right now, Wall Street is downbeat on China, especially as the U.S. has moved to ban investment and exports. U.S. and Chinese regulators are also moving toward forcing some Chinese companies, like the ride-hailing business DiDi Global (DIDI), off of U.S. exchanges.

That is among the reasons Philip Wool, a managing director of Rayliant, is underweight Alibaba in the company’s actively-managed ETF strategy. “This is a company that is more exposed to regulatory issues and in all the areas where regulators have concerns,” he says.

Even before the crackdown, big Chinese Internet giants were struggling to maintain their rapid growth. Within China, Wool favors more onshore companies trading on the mainland that tend to be earlier in the growth trajectories.

“Growth is also much broader so we find opportunities beyond technology, including stocks that may not be on retail investors’ radars in the chemicals and materials sectors that may be part of the supply chain for some of the technologies of interest or financials like China Merchants Bank [3968.Hong Kong], which is growing very quickly because people are getting wealthier and there is a new market for financial products,” he said.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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