The Alibaba (NYSE: BABA) share price has slumped 40% over the past six months. Over the past year, the stock has declined nearly 50%.
As a value investor, this performance has ignited my interest in the China-based, US-listed online giant. As such, I have been taking a closer look at the stock to see if it could be worth adding shares to my portfolio.
Alibaba share price decline
Whenever I come across a stock that looks cheap compared to its trading history, I try to understand why the market has turned its back on the enterprise before making any move.
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With Alibaba, it looks as if the market is worried about the tension between the US and China, as well as growing regulatory threats in China.
Over the past two years, domestic regulators have been clamping down on companies that they believe have too much power. Regulators have also moved against individuals they believe hold too much power, including Alibaba’s founder, Jack Ma.
If there is one thing the market hates more than anything else, it is uncertainty. Right now, there is a lot of that surrounding the business environment in China. It is impossible to tell where regulators will strike next.
What’s more, there has been some speculation that growing friction between China and the US could lead the former to cancel the variable interest entity (VIE) structure Chinese companies like Alibaba have used to list in the US.
This structure is not technically legal, although it is also not technically illegal. As such, there will always be a threat that regulators could opt for the latter. If they do, it is impossible to say what impact this will have on the Alibaba share price.
Business environment
These are the main reasons the market has been selling the stock over the past year. However, away from these headwinds, the corporation’s underlying fundamentals look incredibly attractive. Alibaba is the largest e-commerce enterprise in China, a booming market. For the quarter to the end of September, revenues jumped 30%. Last year, revenues grew 41%, underlining the scale of the company’s growth potential.
Analysts expect the Chinese e-commerce market to grow at a compound annual rate of 12% over the next couple of years. Suppose Alibaba can ride this growth wave and continue to expand its presence across the country. In that case, I do not think it is unreasonable to say that the business can continue to report double-digit sales growth for the next few years.
And if it can hit this target, the stock looks dirt cheap. It is currently selling at a price-to-earnings (P/E) multiple of 17.
Still, despite the company’s potential and valuation, I am not interested in buying the shares for my portfolio. It is impossible to predict how Chinese regulators will act going forward, so I would rather invest my money in a different opportunity.
