Alibaba: Worth The Risk?
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Chinese stocks have lost favor with U.S. investors over the summer months, and for good reason. The Beijing bureaucrats, which for years have approached regulation with the resolve of a bored teenager, have embraced the cause of consumer rights, market abuse, and the misuse of consumer data with zeal.
China recently shocked investors by taking the action of halting for-profit education, thus decimating for-profit education stocks. The government has taken regulatory action against gaming, e-commerce, and streaming media companies. Regulators have halted numerous Chinese public companies from accepting new users.
I see the Chinese regulators’ actions as a simple show of muscle flexing. Once China’s companies toe the line the regulators want toed, the flexing will relax, and so will the regulatory overreach.
I mentioned a couple of weeks ago that Alibaba Group Holdings (BABA) shares appear value priced. The e-commerce and Internet giant appears even more value priced today, thanks to all the regulatory-motivated selling.
To say Alibaba’s business remains robust is to say the obvious. Revenue is still expected to grow at least 20% over the next year. Earning are still expected to grow 16%. Because of the year-long sell-off, Alibaba shares are priced at only 16 times forward EPS estimates.
I perceive a value proposition, and so does Alibaba management. The company has bought 18.1 million of its American depositary receipts (ADRs), the equivalent of ordinary 144.5 million Chinese shares, for $3.7 billion. Management has raised its buyback authorization from $15 billion from $10 billion through 2022. I think it’s an intelligent allocation of company capital.
To be sure, the political risk inherent in Alibaba is disconcerting. If you have a low risk tolerance, you might pass. If you have a high tolerance for risk, though, I think the potential reward Alibaba offers justifies accepting the higher risk.
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