Can the Alibaba share price bounce back post-earnings amid government scrutiny?

So far this year, the Alibaba [BABA] share price has fallen 16%, from $232.73 at the close on 31 December 2020 to $195.19 at the close on 30 July. In the last 52 weeks, the Alibaba share price is down 23%.

Chinese government intervention appears to be one of the causes of the woes in the Alibaba share price. Since the end of 2020, Alibaba has been under the close watch of regulators. Chinese officials called a halt to the planned IPO of the e-commerce company’s affiliate Ant Group last November, reportedly due to corporate governance concerns and criticisms made by Jack Ma, co-founder of Alibaba, about the regulatory system.

In April, Alibaba had to pay a record $2.75bn fine after the Chinese State Administration for Market Regulation stated that it had been “abusing market dominance” since 2015.

“It’s been a difficult year for investors in Chinese stocks due to regulatory interference. This has been an under-appreciated risk for companies where most of the attention has been on the fast levels of revenue growth” - Danni Hewson, financial analyst at AJ Bell

 

“It’s been a difficult year for investors in Chinese stocks due to regulatory interference. This has been an under-appreciated risk for companies where most of the attention has been on the fast levels of revenue growth,” Danni Hewson, financial analyst at AJ Bell, wrote in a note.

 

Alibaba share price down, despite increased demand

The uncertainty has, unfortunately for Alibaba’s shareholders, largely overshadowed the continued strong customer demand the company has experienced.

In its fourth-quarter results released in May, the group posted its first quarterly operating loss since listing in 2014, of $1.17bn. The loss, it said, was mainly down to the anti-trust fine.

Revenues rose 64% to $28.6bn, helped by demand for home furnishings as more people stayed indoors, and annual active customer numbers increased by 32 million to 811 million during the quarter.

  

Its video streaming subsidiary Youku also benefited from the growth in home entertainment, recording 35% growth in average daily subscribers.

Daniel Zhang (pictured), CEO of Alibaba, noted significant growth at Alibaba’s cloud computing arm during the fourth-quarter earnings call. The division saw 37% year-on-year growth to $2.5bn, subdued from the blazing 58% year-on-year growth for the same period a year ago.

 

Looking ahead to Alibaba’s Q1 2021 results

According to Zacks Equity Research, Alibaba is expected to report first-quarter earnings per share of $2.18, up 3.81% on the same period last year, and revenues of $32.67bn, up 50.14%.

While Deutsche Bank’s Vitus Leung expects EBITA to fall 7% due to growing investment spend, he still holds a ‘buy’ rating on the stock and target price of $281, according to The Money Manifesto.

Muslim Farooque, writing in InvestorPlace, also remains optimistic about the Alibaba share price given the pre-and post-pandemic consumer demand. “In each of the years since 2013, its annual revenues have risen by at least 25%. In the past five years, its annual revenues have risen at an average yearly rate of over 48%,” Farooque wrote in a note. “Alibaba will continue playing a pivotal role in supporting growth within the Chinese economy, benefiting from digitalisation in all aspects of life.”

“Alibaba will continue playing a pivotal role in supporting growth within the Chinese economy, benefiting from digitalisation in all aspects of life” - Muslim Farooque

 

Farooque also sees a “massive growth runway” for Alibaba Cloud, given that cloud infrastructure spending has risen by over $2.3bn in the past six quarters in China. 

This is all good news for Alibaba’s share price, but much depends on the future attitude of the Chinese government.

Fears about further interference have resurfaced in recent days with the government clamping down on the recent New York-listed ride-hailing app Didi [DIDI] because of concerns over its data handling practices. It has pulled Didi’s app from Chinese app stores.

As reported by FXStreet, Tencent [TCEHY] Music has also been in China’s bad books and was forced to give up exclusive digital music rights.

US regulators have threatened to force Chinese firms listed in the US to disclose the risk of “Chinese government interference”, which could weigh down shares.

Some investors have pulled out of Chinese stocks as a result, such as ARK’s Disruptive Innovation ETF, which, according to Bloomberg, has reduced its exposure to Chinese tech stocks to less than 1%, from 8% in February.

The Chinese government has tried to reassure global investors this week by stating that it would consider the impact on markets when it introduces new policies.

“Some investors will swoop in and see these events as a major buying opportunity for Chinese tech stocks. However, they must exercise extreme caution as the situation remains highly unpredictable and any further similar actions – or even suggestions – from Beijing will mean more, sustained volatility and sell-offs” - Nigel Green

 

“Some investors will swoop in and see these events as a major buying opportunity for Chinese tech stocks,” Nigel Green, chief executive of asset manager deVere Group, wrote in a note. “However, they must exercise extreme caution as the situation remains highly unpredictable and any further similar actions – or even suggestions – from Beijing will mean more, sustained volatility and sell-offs.” 

If government pressure eases, the Alibaba share price could have plenty of upside given the surge in e-commerce spending during the pandemic and the rise of cloud services among Chinese businesses.

The iShares MSCI China ETF allocated the Alibaba share price a 13.21% weighting. The fund’s year-to-date daily total return is down 12.17%. Meanwhile, the ProShares Online Retail ETF has a 13.49% weighting and a return of 0.67%.