Why Alibaba Plummeted on Monday
What happened
Alibaba Group Holding (NYSE: BABA) shares were falling Monday, down about 7% as of 11:41 ET. The Chinese e-commerce giant held its annual investor day event last Thursday and Friday to outline its strategy for growth. Apparently, the strategy underwhelmed investors.
Alibaba faces high hurdles to regain any sort of positive sentiment. That's especially true after another regulatory announcement from China's antimonopoly bureau on Sunday, which likely also played a part in depressing shares to open the week.
Image source: Getty Images.
So what
On Sunday, Gan Lin, the chief of China's Anti-Monopoly Bureau, said that his unit would step up enforcement of anti-monopoly rules and regulations. While much progress has already been made, Gan claimed that some businesses in China's new tech economy have faced "insufficient punishment" for anti-competitive behaviors.
This likely wasn't what Alibaba or Chinese technology investors wanted to hear, as Alibaba has already been through so many regulatory assaults over the past year. Many likely hoped the campaign would be coming to an end by now, but Gan's comments seemed to throw cold water on that thought.
After a terrible 2021, many are likely hoping for a 2022 turnaround, especially after Alibaba stock had a good week the week of Dec. 6. Yet management laid out its growth plans at the company's annual investor day late last week, and there wasn't anything particularly new or exciting that I saw in the presentation.
Alibaba will try to strengthen its core e-commerce business in tier one cities through the use of artificial intelligence (AI) and big data insights. And while the company also cited a number of growth areas, those new segments are currently losing money and will require heavy investment. These include penetration in lower-tier cities, fast-moving consumer goods, local services and delivery, logistics, international growth, and the cloud.
The problem is the core business is slowing while these new growth drivers have an uncertain payoff. Hence, the investor skepticism and low multiple.
Now what
Alibaba is still very cheap at about 14 times this year's earnings estimates (ending in March) and 12 times next year's earnings estimates. However, increased regulatory scrutiny and competition, as well as the prospect of de-listing, remain headwinds. Alibaba could make a terrific long-term buy from here, but investors need to be fully conscious of these significant risks before diving in.
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Billy Duberstein owns Alibaba Group Holding Ltd. 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.
