Many companies had a pretty good 2023, as inflation continued to cool, and technology such as AI pushed the market higher. However, one company in my Stocks and Shares ISA stands out as a clear loser. E-commerce giant Alibaba (NYSE:BABA) had another rough year, as geopolitics and negative sentiment weighed on the share price. However, I’m not giving up on this one long term.
What does it do?
In the bustling realm of e-commerce and technology, Alibaba is an absolute colossus. The company is often compared to Amazon in the West, as it also operates in areas including cloud computing, artificial intelligence, and even entertainment.
The ability to generate revenue from multiple sectors is always something I target when it comes to companies in my ISA. This is especially true when these areas have the potential for very high profit margins.
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2023 was an eventful year for the company. It announced a split into six distinct units, came up with a dividend, and saw continued tensions in its region. In the last year alone, the share price is down over 40%.
Continued risks
Recent years have seen Beijing tighten its grip on tech giants, and Alibaba has clearly felt the heat. These regulatory challenges have led to uncertainty on future revenues, severely impacting investor confidence and the performance of my ISA. The threat of Chinese companies being entirely delisted from global markets is also never far away, spooking many would-be investors.
Market volatility is another key factor for this sort of stock. As many investors with a Stocks and Shares ISA in 2023 learned, no company is entirely immune to global economic swings and US-China trade tensions. Moreover, the competitive arena is getting tougher. Rivals in both the e-commerce and tech sectors, such as PDD, are vying for a slice of the pie in the Chinese market.
The fundamentals
Yet the gap between the performance of the company, and the share price, has been pretty notable for Alibaba. As the share price continued to decline, the company saw many of its key performance metrics improving steadily. The firm’s ability to generate and increase cash flow is seriously impressive, but the price-to-earnings (P/E) ratio of 9.7 times is now well below that of rivals Amazon at 80.2 times.
Based on a discounted cash flow, the current share price could be over 35% undervalued. Of course, there’s no reason the decline can’t continue in 2024. But at some point, I suspect many long-term investors using an ISA and having a strong stomach will see there’s a tremendous opportunity here.
Am I buying?
I’ve long been a believer in the company. I see the decline of the last few years as an unfortunate consequence of geopolitics, all while the fundamentals of the business improve steadily. In the near term, I fully expect these tensions and general volatility to continue, but I’m confident that Alibaba’s potential will win out in the end. This makes this a potential winner for my ISA. I’ll be buying more over the coming months.
