Why This Analyst Says Buy Alibaba on the Pullback

Oanda's Jeffrey Halley weighs in with CapitalWatch. (Plus, a small-cap China stock you need to buy.)
Anthony RussoNov 17,2020,22:47

As stocks have been rising across the board in the U.S., some Chinese tech giants find themselves not only left out of the rally but are looking to recover from their stock losses suffered last week. Of course, Chinese tech giants weren’t alone, as some fast-food stocks were overlooked last week with investors focusing on casual diners due to the positive news on the vaccine front.

But unlike fast-food stocks, large-cap Chinese tech firms aren’t being overlooked; instead, investors have sold off or are avoiding them over fears of Beijing unveiling new regulations that aim to crack down on monopoly practices.

The biggest concern appears to be over China’s largest e-commerce player Alibaba (NYSE: BABA; HKEX: 09988), whose stock has yet to bounce back from the precipitous drop.

The new rules aim to block e-commerce platform strategies like “choose one between two,” which Alibaba uses, according to Reuters. In 2019, China’s State Administration for Market Regulation, which issued the rules last week, met with 20 platforms and asked them to cease requiring merchants to sign exclusive cooperation deals.

"We believe the guidelines if strictly enforced, could weaken the bargaining power of those big platforms in dealing with merchants," analysts from Nomura said in a research report last week, as cited by CNN Business.

Alibaba Continues to Plummet Despite Record Singles’ Day Sales

While many big Chinese tech stocks using monopolistic practices have been recovering since the sell-off, Alibaba still finds its shares down significantly. Since last Monday, Alibaba’s Hong Kong stock has plunged 14%, while its New York shares have fallen 12%.

During the big two day sell-off period last week, Chinese tech giants including Alibaba and Tencent (HKEX: 00700; OTC: TCEHY) lost nearly $290 billion in market value, according to Bloomberg.

What made the timing of the sell-off more ironic was Alibaba was getting set for perhaps its biggest sales event of the year Singles’ Day, or China’s largest shopping festival that typically runs annually on Nov. 11 through 24 hours. However, this year Alibaba along with its e-commerce rival JD.com (Nasdaq: JD) started their big discounts on Nov. 1 and ended them at midnight on Nov. 12.

As a result, Alibaba wound up crushing last year’s figures; its gross merchandise value during the 11 days more than doubled to 498.2 billion yuan ($74.1 billion).

Meanwhile, Alibaba, which currently trades less than 28 times its earnings has been the hardest among Chinese tech giants and hasn’t seen much recovery since early last week. As for its e-commerce rival JD.com, its New York stock actually fully recovered on Friday but then slipped again early this week. Gaming giant Tencent, whose WeChat social media app has faced heat from Washington this year, has been inching towards recovery and now finds its Hong Kong and its OTC U.S. stock down just 7% and 5% respectively.

A big reason why investors have been more reluctant on Alibaba’s shares is over its fintech arm Ant Group seeing it's record-breaking IPO put on hold over regulatory concerns. Jeffrey Halley, a senior market analyst for Asia Pacific at Oanda says that JD.com is more of an “ecom play” when compared to Alibaba's diversified profile.

“Alibaba has diversified into cloud, financial services amongst others,” he told CapitalWatch in an email.

He added, “It also cross subsidies cloud via its profitable ecom silo.”

In other words, the company is not just a one-trick financial services pony. And investors need to seriously consider the strength its diversified synergies in order to appreciate the firm's potential.

Should You Buy Alibaba at the Dip?

Now the question is, should you look past the regulatory concerns and use this window as a buying opportunity? Raymond James’ Aaron Kessler thinks so.

“At this point, we do not believe the antitrust guidelines would have any material impact on Alibaba revenues,” The five analyst said, who reiterated his “Buy” on Alibaba last week following the sell-off, as cited by Barron’s.

He added, “It could also serve to limit new entrants from aggressively pricing to gain market share, which could be viewed as a positive for BABA.”

Assuming the new regulations go into effect, Halley notes there won’t be an immediate impact on earnings. Medium-term, he thinks the potential new rules are likely to “limit earnings” rather than “erode them.” As for the long term, Halley expects all the “major players” to “adapt and prosper,” but adds that a lot will depend on how the Biden administration acts on “China trade.”

“Simply put, the big technology Chinese companies will struggle to expand internationally if the new [administration] feels they are being unfairly protected behind the great firewall of China,” he said.

Personally, if it’s up to me, I would take a bite at Alibaba shares at its current levels. The big Singles’ Day record-smashing sales and the e-commerce demand in China is enough for me to overlook Beijing’s new regulations for now and buy Alibaba. Plus, if it doesn’t see much gains in the next couple of months, you always sell it.

Investors Eye New Opportunities

But of course, some investors have been concerned and are looking at other opportunities in case the new rules take a toll on China’s tech leaders. As a result, smaller U.S.-listed Chinese online retailers including Vipshop Holdings, (NYSE: VIPS) and Pinduoduo (Nasdaq: PDD) have watched their stocks gain.

Guangzhou-based Vipshop has also been befitting on posting better-than-anticipated financial results for the third quarter. Its revenues for the three months ending September came in at $3.4 billion, up 18% year-over-year on adjusted earnings of 30 cents per share. Since its close on Nov. 10, shares of Vipshop are up 15% to date.

But on the other hand—the stock gain is nothing compared to Pinduoduo. Since Nov. 10, shares of Pinduoduo have leaped 28% to date thanks to it posting impressive third-quarter sales of its own. Its revenues surged to $2.1 billion, up 89% year-over-year, while it reported a surprise adjusted profit of RMB0.33 per ADS. The FactSet consensus was calling for a loss of RMB1.14. per ADS.

For comparison's sake, Pinduoduo is a much larger company versus Vipshop, as it just sits behind JD.com and Alibaba in China’s e-commerce market. It has a market capitalization of $158.53 billion compared with Vipshop’s that’s just over $16 billion.

One Small-Cap Chinese E-Commerce Firm to Buy

But one e-commerce firm you may want to consider buying right now is LightInTheBox (NYSE: LITB). While LITB has dealt with a compliance issue in the past for not meeting the New York Stock Exchange’s minimum bid required bid price—that appears to be well behind the company now.

Thanks to huge demand from customers, LITB’s posted revenues that reached $114 million, up 96% year-over-year in the second quarter. It also turned profitable in the quarter on a net income of $8.5 million, in contrast with a net loss of 7.3 million in the same period in the preceding year. For the third quarter, it expects its revenues to come in the range of $95 million to $110 million, representing year-over-year growth between 59% and 83%.

With a stock that trades at just 20 times its earnings, LITB could be great value for investors. I would look to buy. The stock currently trades at $2.54 per share with a valuation of nearly $284 million.

However, I’m not sure if I could say the same for Vipshop and Pinduoduo; I would euphoria play out and see if the stocks fall before looking to buy.

Not Low Risk, But High Reward

While it would be gutsy to buy Alibaba now, investors could be getting great value in a company that’s likely to see sky-high demand in the fourth quarter. To me, a buy and potentially sell just months after purchasing is the wise way to play it.

But of course, a bet in Alibaba in other Chinese tech giants does not come with low risk.

“I would say that [Chinese tech giant’s] longer-term valuations will be less [then] they would otherwise have been, but will remain positive," Halley notes.

But if you are concerned with Alibaba and other tech giants, LITB could bring solid value for investors as well.

Topics:Alibaba, JD.com, Tencent, Vipshop Holdings, WeChat, Pinduoduo, LightInTheBox, Singles’ Day.