Bottom line: Alibaba’s stock is likely to face downward pressure through the end of the year, but could see a modest rally of up to 20 percent in 2016 as speculators pile out and founder Jack Ma enters a period of relative silence.
Many are taking advantage of the one-year anniversary of Alibaba’s (NYSE: BABA) record-breaking IPO to reflect on the past 12 months and what the future might hold for the company, especially for its stock that has gone on a roller coaster ride in that period. Many are quite subdued and even bearish on the stock, citing bad investments and a slowing Chinese economy. But I would actually take a contrarian view and say the shares could be poised for a modest rebound next year after China’s stock markets settle from their current turbulence.
My theory is rather simple. Alibaba’s stock became the plaything of speculators in the first year of trading after its $25 billion New York IPO last September became the biggest offering of all time. First it was the bulls who piled in, buying into the hype that Alibaba happily dished out about the explosive growth potential of China’s e-commerce market. More lately the bears have moved in, seizing on slowing growth, questionable investments and a piracy scandal to make some short-selling profits on the overvalued stock.
At the end of the day, Alibaba is what it is: A reasonably well-run and well-positioned company in a market with huge potential. What’s more, its valuation actually looks fairly reasonable, following a long-running sell-off that has seen its shares tumble by more than a third since the start of the year to slightly below their IPO price.
If history is any indicator, Alibaba is likely to enter a relatively “quiet” period in 2016, following the continuous stream of bad publicity that has dogged the company over the last year. Much of that bad publicity is the fault of founder Jack Ma, who loves attention and talks ad nauseum about how his company will revolutionize the world to anyone who will listen. But Ma also has an established track record of going into hibernation when people get tired of listening to his stories, or when his company gets dogged by bad news.
Such quiet periods are often some of the most exciting times for Alibaba from an investor’s perspective, as they finally clear out all the speculators who leave for lack of major news. After they go, people can finally sit back and take a closer look at Alibaba’s fundamentals, which basically look quite sound and offer good growth potential.
Roller Coaster Stock Ride
All that said, let’s briefly review all the hype and subsequent negative developments that have led to the present. The hype seems like a distant memory now, and had Ma talking up the huge potential of China’s e-commerce market in the run-up to his IPO on September 17, 2014. Adding to the excitement were a string of high-profile investments into a wide range of new areas, from online mapping to social media and film production. Estimates vary on total size of the investments, with one report putting the number as high as $15 billion.
Then came the downturn, which began in January with the release of a Chinese government report that criticized Alibaba for hosting major trafficking in pirated goods on its main Taobao C2C e-commerce site. That was followed by a string of more minor negative developments, including word that billionaire investor George Soros had sold off his stake in the company. At this point analysts using hindsight are saying that many of Alibaba’s big investments don’t make sense, which was already obvious at the time but is now providing further reason to sell the stock.
As all that has happened, we’ve seen Alibaba make a few attempts to respond to some of the negative reports. But besides that, the hype machine has largely gone silent as Jack Ma retreats into his cave and waits for a return to sunnier days. That means we can finally look at the company’s fundamentals, starting with profit and revenue growth that look relatively strong in its core e-commerce business. The company has a price-to-earnings ratio of 25 that also looks relatively comfortable, comparable to hometown peer Baidu (Nasdaq: BIDU) and well below the lofty level for Facebook (Nasdaq: FB).
The bottom line is that Alibaba’s stock will probably continue to be a play toy for Wall Street bears through the end of the year, which is when I expect that interest could start wane as China’s domestic stock markets stabilize and the country’s economic outlook become clearer. After that, a new period of relative quiet could finally settle in around the company, and I wouldn’t be surprised to see the shares rise up to 20 percent in 2016 as serious longer-term investors start to take a look.
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