China’s anti-monopoly crackdown has weighed heavily on the Alibaba [BABA] share price in 2021 thus far. the Alibaba share price is down 7.7% in the year to date, closing at $214.76 at the close on 15 July. Furthermore, it has fallen 21.7% from its 2021-high of $274.29, recorded in February and 32.7% from its all-time high of $319.32, set on 27 October 2020.
In mid-April, Beijing regulators levelled an RMB18.2bn fine at the Chinese e-commerce titan, accusing it of anti-monopoly violations. This led to it reporting its first quarterly loss since going public in 2014.
Valuation of Alibaba's fine from Beijing regulators
Alibaba accepted the fine and vowed that it will change. But while there is optimism that the stock can make a comeback in the long term, the near-term impact on the Alibaba share price hasn’t been pretty. Since the fine was issued the stock has fallen further, recording a 52-week low of $198.26 on 8 July.
As with many of the other US-listed Chinese big tech stocks, the Alibaba share price has continued to drop due to geopolitical tensions between the two countries and the threat of stocks being delisted.
Head in the cloud
Of course, Alibaba can’t control what further crackdowns might come in the future, but it can continue to diversify its business away from e-commerce.
One segment that appears to be going from strength to strength is its cloud business. For the third quarter, 2021, Alibaba reported that Alibaba Cloud had turned profitable.
Towards the end of last year, its year-over-year growth was outpacing that of Amazon [AMZN] Web, however. Cloud growth did slow in Q4 2021 due to the loss of a major customer — identified by Nikkei Asia as TikTok owner ByteDance – but there are reasons for optimism.
Alibaba is reportedly one of a number of parties linked with the purchase of a $7.7bn stake in cloud computing infrastructure firm Unisplendour [000938.SZ]. According to Reuters, Tsinghua Unigroup Co is seeking to sell its 46.45% stake in Unisplendour due to debt issues — the former was one of the biggest defaulters in China in 2020.
There’s no information as to why Alibaba is eyeing up the acquisition or what it’ll mean for the business if it goes ahead, but it’s undoubtedly a sign that Alibaba is looking to strengthen its cloud segment.
Attempting an acquisition amid China’s crackdown on big tech may seem a bit risky but Alibaba will have been buoyed by the regulators approving Tencent’s [TCEHY] buyout of China’s second-largest search engine Sogou [SOGO]. The two will combine to make a super game-streaming platform.
Diversification is food for thought
Away from the cloud, the online grocery business, including online food delivery, is expected to be a key driver for the Alibaba share price.
Vincent Yu, senior analyst at Needham, believes the stock is an attractive buy and has set the Alibaba share price a target of $330, which implies a 58% increase from its 13 July closing price.
In a note to clients seen by Benzinga, Yu said Alibaba’s recent restructuring of operations to combine digital mapping platform Autonavi, online travel business Fliggy, and local services platform Ele.me, will help Alibaba to go head to head with on-demand local services and food delivery giant Meituan [3690.HK].
Another tailwind, noted Yu, is the speed of Ele.me merchant onboarding, which has been increased due to diminishing competition. This has come about as a result of antitrust regulators stopping food delivery operators from forcing merchants to sign exclusivity contracts.
"While the regulatory environment is challenging, we think the worst period is over for Alibaba and further downside [for the Alibaba share price] is limited," said Yu.
“While the regulatory environment is challenging, we think the worst period is over for Alibaba and further downside [for the Alibaba share price] is limited” - Vincent Yu, senior analyst at Needham
Given the ongoing uncertainty about further crackdowns from Beijing, it’s unsurprising that some of the exchange-traded funds (ETFs) that hold Alibaba have been trading at or around their lowest price for a year. For example, the KraneShares CSI China Internet ETF [KWEB] has a dismal year-to-date return of -20.54% — the fund has assigned Alibaba a 9.23% weighting.
The iShares MSCI China ETF [MCHI] has a daily total return of -4.4% and Alibaba has been allocated 13.2% of its total assets.
ETFs in which Alibaba has a less heavy weighting and take a more global approach offer better returns. Invesco RAFI Strategic Emerging Markets ETF [ISEM] has returned 10.2% so far this year and the SPDR Global Dow ETF [DGT] has returned 16.6%.