Alibaba posted its first quarterly loss since going public last week amid a $2.8 billion antitrust fine and said it would invest aggressively to ward off competition. The regulatory scrutiny that began with the surprise scuttling of the public offering of Ant Financial, which Alibaba (ticker: BABA) owns roughly a third of, has continued to spread, looming over the once-high-flying Chinese technology giants. That pressure has become more of a drag in the past three months, with the Internet-heavy iShares MSCI China exchange-traded fund (MCHI) down nearly 19% over the last three months while it is up more than 6%.
Most expect Beijing’s anti-monopoly push to continue as regulators try to improve the competitive landscape by reigning in behemoths, much like the U.S. and Europe are thinking about with other Internet giants. In the long run, these measures could help the innovation policymakers are banking on for China. But it’s not regulatory pressure but competition that Justin Leverenz, a long-time investor in the company and manager of almost $50 billion. Invesco Developing Markets Fund. (ODMAX) is seen as the more significant threat to the company’s fundamentals. That’s one reason he has whittled Alibaba down to under 3% of assets as of the end of the first quarter, from as high as 9% in the fall of 2019.
“The real problem is that the empire got way too large and way too audacious, not for regulators but for their capacity to pull together synergies and make the whole thing work,” Leverenz tells Barron’s. The company faces fierce competition from more agile companies like (PDD) in its core e-commerce business. As many of Alibaba’s original partners have their wealth and time tied up in Ant and other outside ventures, and founder Jack Ma is no longer actively involved, Leverenz worries the company “has lost its mojo.”
For Leverenz to turn more positive on Alibaba, he says the company would need to become bolder and focus on core e-commerce and de-emphasize what he describes as “unwinnable battles” in areas like online video, food delivery, and “new retail” efforts while also considering consolidation opportunities in Southeast Asia. Another bold move could be to put Ant—and its Alipay platform—at the center of its strategy to build a competitive distribution platform that could rival the likes of Tencent with loyalty and membership offerings to strengthen its core businesses.
Wall Street is more optimistic about Alibaba, with analysts on FactSet mostly rating the stock Buy, with a mean target price of $301, representing more than a 40% upside from current prices. But there are signs of wariness as Alibaba indicated a willingness to prioritize earnings for growth and losses in its new strategic initiatives. Robin Zhu, the China Internet analyst at Bernstein, wrote a note to clients.
If Alibaba’s losses in its initiatives run into the “multiple tens of billions” of yuan in fiscal 2022, that would “almost certainly trigger further downward revisions to street earnings estimates,” Zhu wrote. Lack of tangible evidence of notable market share gains in areas like community group buying or food delivery remains a concern, said Zhu, who has a Market Neutral rating and a $260 price target on the stock.
That could suggest more pain for Alibaba—a reason bargain hunters may want to move slowly. Alibaba shares closed up almost 1% to $211.05 in New York trading on Monday. Write to Reshma Kapadia at [email protected]
