Is BABA Stock a Solid Long-Term Investment?

Alibaba

Alibaba is one of the most notable megacorporations of the modern world. In particular, it is more than a bit reminiscent of Alphabet, Amazon, and other tech titans, which makes sense because it is one itself. However, Alibaba is quite different from those companies because it started up in China rather than in the United States. For those who are unfamiliar, a good portion of the 20th century was dominated by the ideological contest between capitalism and communism. Capitalism supported market economies in which the free market determined prices as well as production for the most part. In contrast, communism supported command economies in which the central government determined prices as well as production. Communist China is, well, communist. As a result, it should come as no surprise to learn that it had a command economy until 1978, which was when it started transitioning into a mixed economic system that boasts both capitalist and communist elements. This process didn’t happen all at once. Instead, it happened in stages. For example, the initial period in the late 1970s and early 1980s saw massive changes such as the ability for people to start businesses as well as the ability for foreigners to make investments. However, a huge percentage of industries were still under state ownership in those times. Even more massive changes were still to come in the late 1980s and 1990s. One example would be the lifting of price controls in 1985. Another example would be the privatization as well as the contracting-out of much of those state-owned industries in that period.

Chances are good that interested individuals can guess that a lot of Chinese people got rich by capitalizing upon these economic reforms. Jack Ma and the other 17 individuals who co-founded Alibaba can be considered excellent examples. As the story goes, he was one of the numerous people who were introduced to the Internet in the 1990s, with the result that he became aware of its enormous potential for profit-making when he started receiving communications from Chinese investors after he and one of his friends put up a China-related website. For a time, Ma did various kinds of IT-related work. Eventually, he made the decision to quit his job at the head of a government-founded IT company for the purpose of starting up his own company in 1999. Initially, Ma and the other 17 individuals were working with a very limited amount of capital. However, it wasn’t long before that started to change, as shown by how they received $25 million from Goldman Sachs and Softbank in late 1999 and early 2000. From that point on, Alibaba’s growth has been nothing short of meteoric. As for the name, chances are good that interested individuals can guess that it is a reference to the famous story called “Ali Baba and the Forty Thieves.” There seems to be a couple of reasons why it winded up being chosen. One, Ali Baba is familiar to a wide range of people in a wide range of countries. As a result, Alibaba could benefit by tapping into that well-established reservoir of recognition. Two, the story has a well-known catchphrase in the form of “open sesame,” which was used to open the cave in which the titular thieves had concealed their stolen treasures. The catchphrase has strong connotations of “wealth,” “wonder,” and “amazing possibilities,” so it isn’t hard to see why Ma and his co-founders would want to benefit from that as well.

What Does Alibaba Do?

Alibaba tends to be best-known for offering a digital marketplace where buyers and sellers can connect with one another. It is the dominant player in its homeland. Something that is particularly notable because the Chinese online retail market is the single biggest online retail market that can be found in the entire world, so much so that it was responsible for 52.1 percent of relevant sales in 2021. However, it is important to note that Alibaba is by no means limited to its homeland because it has long since gone global. Of course, the company faces serious competition in both. It is by no means the sole Chinese megacorporation that offers digital marketplaces, meaning that it can’t expect to retain its position without continuous effort. Similarly, it has plenty of competition on the world stage from Amazon as well as other companies that provide similar services on either a national, a regional, or even broader scale.

Commerce is by far Alibaba’s single most important source of revenue. Its Chinese commerce made up 71 percent of its earnings in Q3 of its fiscal year 2022, which ended on December 31 of 2021. Meanwhile, its international commerce made up another 7 percent of its earnings in the same period. Combined, it isn’t hard to see why Alibaba is best-known for being involved in commerce. Still, it is important to note that the company has long since branched out into other things as well. This can be seen in how its cloud segment was responsible for a somewhat bigger percentage of its earnings at 8 percent than its international commerce. Similarly, this can be seen in how it is also involved in local consumer services, logistics and supply chain services, digital media, and innovation initiatives. Of course, Alibaba faces serious competition in every single one of these segments from both Chinese and non-Chinese companies as well.

Its Price Took a Serious Tumble

For starters, Alibaba’s stock price took a serious tumble in 2021, with the result that it is now much lower than the all-time high set in October of 2020. That can seem like a rather strange cause for optimism on the part of the people who are looking for a long-term investment. However, interested individuals need to remember that they are looking for something that will increase in value in the long run, meaning that a low stock price at the moment can be either a good thing or a bad thing depending on exactly what is going on. If a company has strong fundamentals, it seems reasonable to speculate that its stock price will increase in the times to come. In that case, a low stock price is a good thing because that means that interested individuals can reap a bigger reward if they choose to bet on it. In contrast, if a company has weak fundamentals, well, that means that the low stock price might be reflective of where its stock price should be. Something that bodes less well for the company’s future stock price. In other words, investors make money by buying low and selling high. Thanks to that, a low stock price can mean a bigger time for them to buy in assuming that a low stock price is just a temporary thing rather than a permanent thing.

Its Prospects Seem to Be Good

No one can say with perfect certainty whether a company will continue doing well or not. However, there is reason to believe that Alibaba can expect to continue doing well in the near future. Essentially, its core offering is doing well, which is important because as mentioned earlier, its core offering is by far its most dominant segment. Meanwhile, some of Alibaba’s other segments might not be earners right now but are nonetheless believed to show promise, meaning that they could become earners in the future. Something that isn’t exactly uncommon because it takes time for even the biggest companies to build up entire units, particularly when those happen to be involved in high tech matters. Of course, sustaining such processes can be risky for companies that don’t have a lot of resources to call upon. Fortunately, Alibaba doesn’t seem to be one of them because it has huge cash reserves plus investments in other companies. Both of which can make for useful cushioning from the wide range of woes that companies can run into.

Economic Uncertainties

People have been predicting a major economic downturn in China for years and years. So far, their record of making accurate predictions has been pretty poor. Still, that doesn’t mean that China will never see a major economic downturn. If that happens, that could have a significant impact on Alibaba for much the same reasons that major economic downturns can have very negative consequences for other online retail giants. As for why people are so spooked by the thought of a major economic downturn in China at the moment, well, there are a number of things. For example, there is fear that the troubles of the large real estate developer called the Evergrande Group could have a cascading effect on the rest of the Chinese economy. Similarly, there is a low though nonetheless existent chance of the Chinese government targeting foreign investors if the ongoing U.S.-China tensions see a particularly bad flare-up. Unfortunately, the fact that so many people are so emotionally invested in these issues makes it that much more difficult to guess what will happen, particularly since there are other complicating issues as well.

Regulatory Uncertainties

Regulations can have a huge effect on businesses. This is true even for the true megacorporations such as Alibaba that can be found out there because while they can be more powerful than some governments, they are by no means more powerful than the most powerful governments that can be found out there. In recent times, people have been very concerned by what has been called the Chinese government’s crackdown on Chinese megacorporations. There isn’t a single reason for why this is happening. Indeed, anything happening on this kind of scale is too complex to have a single cause. Still, there are a number of explanations that have come up more than others. To name an example, there is speculation that the Chinese government developed an awareness of exactly how much power Chinese megacorporations had managed to gather to themselves through their data collection as well as other processes during the COVID-19 crisis. Something that made it more than a bit uncomfortable. To name another example, Chinese megacorporations have been getting up to the same kinds of shenanigans as their counterparts elsewhere. For example, the use of gambling mechanics in free-to-play games that are used to extract more money from the consumers. Similarly, the use of social media to convince people to do things that they wouldn’t do under other circumstances, with a particularly memorable example being encouraging idol fans to spend beyond their means by deliberately fanning the rivalries between rival idol fandoms. These things make for an unhappy people, who in turn, make for an unhappy society. As a result, the Chinese government has decided to crack down on certain company practices that it believes to be detrimental to the Chinese population. Much of the fear comes from the uncertainty of how these things will turn out. However, the fines and other penalties are very real, as shown by the recent $2.8 billion fine on Alibaba itself for violating anti-monopoly rules as well as the blocking of the Ant Group IPO. It is extremely unlikely that the Chinese government will go as far as to break Chinese megacorporations because they are seen as symbols of pride for the country itself. Still, there is a lot of room between breaking them and letting them do whatever they want, thus making for another source of anxiety.

Should You Invest in Alibaba?

Summed up, Alibaba is at an interesting point in its existence. Assuming that nothing goes spectacularly wrong, it could continue doing quite well for itself. Something that can make it attractive as a long-term investment. However, there are also real reasons for people’s fears, which need to be looked into rather than just straight-up dismissed. As always, interested individuals need to consider what they want from their long-term investments before they start looking into their options. They have time to prepare, meaning that they should make good use of it to ensure that they make the right choice for themselves.

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