Insights

Why Alibaba Fell Hard on Friday

What happened

Shares of Chinese e-commerce, payments, and cloud giant Alibaba (NYSE: BABA) fell 5% Friday after a positive session Thursday that followed the delivery of better-than-feared quarterly results.

Tech stocks broadly struggled Friday after the Labor Department released a July jobs report showing that the U.S. labor market is still red hot, sparking renewed fears that the Federal Reserve will enact more aggressive hikes to the benchmark federal funds rate. Higher interest rates could also strengthen the dollar further, especially relative to the Chinese yuan, since China’s economy is struggling right now. A stronger dollar would decrease the value of Alibaba’s earnings in dollar terms, so it’s perhaps no surprise the company’s U.S.-listed shares gave back some of Thursday’s gains.

Meanwhile, heightened geopolitical tensions between the U.S. and China emerged this week and worsened on Friday, which likely didn’t help matters.

So what

For the quarter that ended June 30, Alibaba’s revenue was roughly flat versus the prior-year period, with its e-commerce empire’s revenue falling only 1% (though that beat analysts’ expectations), while its cloud unit grew 10% year over year. Earnings per share declined 29% as the company’s cash cow Taobao and Tmall platforms saw mid-single-digit percentage declines in gross merchandise volume, harming profitability by even more.

Still, those results were actually much better than analysts had feared they would be given China’s ongoing economic problems, which included intense COVID-19 lockdowns in several key metropolitan areas for much of the quarter.

Of course, these results weren’t good overall, so investors may be thinking twice about Thursday’s gains. Alibaba, in fact, announced 10,000 layoffs Friday, signaling its growth headwinds could persist for some time.

Additionally, Chinese stocks tend to fare poorly when U.S.-China relations deteriorate, and there continued to be ominous developments Friday after this week’s visit by House Speaker Nancy Pelosi to Taiwan. In addition to China firing ballistic missiles over Taiwan into Japanese-controlled waters on Thursday, China announced Friday that it was cutting off dialogue with the U.S. on both military and climate matters.

In the wake of escalating tensions, it’s perhaps no wonder U.S. investors sold off U.S.-listed Chinese stocks broadly, and Alibaba specifically.

Now what

Leading Chinese stocks present a quandary for U.S. investors today. On the one hand, China does have a rising middle class and, in theory, higher growth prospects than the U.S. — although this year’s struggles will bring China’s growth down to U.S. levels, or worse.

In addition, Alibaba looks quite cheap by conventional metrics. The stock trades at only 11 times forward earnings estimates, and it has a cash balance of $67 billion — about a quarter of its market cap — against just $22 billion in debt. This is in addition to the company’s 33% stake in Ant Financial, the fintech juggernaut that is still a private company, as well as equity stakes in other companies.

Alibaba could therefore be a screaming bargain if the Chinese economy turns around, if its heavy spending on the cloud and other new initiatives pays off, and if Chinese-U.S. relations improve.

However, that seems like an awful lot to expect these days — especially when it comes to that last issue.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned.  The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

  • This field is for validation purposes and should be left unchanged.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Rebate Rewards

Level 2 Rebate

Deposit $2,000 and get $200 Rebate
$ 200 Rebate
  • 3 Simple Steps
  • 1. Register Using The Link Below (Promo-Code: WEBREBATE)
  • 2. Deposit $2,000 and place one trade at any non-Austalian market within 30 calendar days
  • 3. Receive Your $200 Rebate
Popular

Level 1 Rebate

Deposit $1,000 and get $100 Rebate
$ 100 Rebate
  • 3 Simple Steps
  • 1. Register Using The Link Below (Promo-Code: WEBREBATE)
  • 2. Deposit $1,000 and place one trade at any non-Austalian market within 30 calendar days
  • 3. Receive Your $100 Rebate

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex Securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

EASY QUALIFICATION & LOW ENTRY
NEW CLIENT REBATE OFFER
EARN UP TO $200 CASH REBATE
Act Fast - Promotion Ends In
Click Here To Get Started
EASY QUALIFICATION & LOW ENTRY
NEW CLIENT REBATE OFFER
EARN UP TO $200 CASH REBATE
Act Fast - Promotion Ends In
Click Here For More Info