Alibaba (NYSE: BABA) recently made headlines with its substantial $4.8 billion share repurchase in the first quarter of 2024, marking the second-largest quarterly buyback in the company’s history. This move appears to be a prelude to the $25 billion expansion of its share buyback program, as disclosed during its fourth-quarter 2023 earnings call back in February.
However, despite this bold financial maneuver, the market’s response has been lackluster, with the stock registering a decline at the time of this report. This adds to the ongoing challenges faced by Alibaba, a stock that has seen a decrease in value since its IPO in 2014. Given this context, investors are left pondering whether this share buyback is the catalyst needed to ignite a recovery for the Chinese e-commerce behemoth or if caution is warranted.
Unfazed Investors and the Alibaba Conundrum
It comes as no surprise that some investors remain unfazed by Alibaba’s sizable stock repurchase. The underlying issue lies in the broader sentiment that Alibaba and other Chinese stocks are currently viewed as unattractive investment options.
This apprehension stems from the delicate state of U.S.-China relations, with the potential for delisting of Chinese stocks looming large back in 2022 due to regulatory concerns. This uncertainty added a layer of risk to Alibaba, especially given that its shares are represented by American depositary receipts (ADRs) rather than direct ownership stakes.
Deciphering the Alibaba Risk Premium
Despite facing a myriad of challenges, investors are justified in questioning whether the existing risks associated with Alibaba are already baked into its stock price. The company has experienced a significant decline in value over the past decade, even as its revenue surged from 19 billion renminbi ($2.6 billion) in 2013 to a whopping 260 billion renminbi ($36 billion) in 2023, marking a remarkable 13-fold increase over a decade.
Moreover, Alibaba’s net income has seen substantial growth, climbing from 8 billion renminbi ($1.2 billion) in 2013 to 46 billion renminbi ($6.3 billion) last year. Despite this robust financial performance, the stock continues to trade at a lower valuation, with its price-to-earnings (P/E) ratio standing at a modest 13, a stark contrast to its earlier multiples exceeding 40. While this P/E multiple does reflect the inherent risks, a potential recovery could yield significant gains for investors.
Assessing the Investment Case for Alibaba Stock
Given the geopolitical complexities involved, risk-averse investors may opt to steer clear of Alibaba stock. However, those with a higher risk tolerance and a penchant for speculative investments may find merit in considering Alibaba as a potential opportunity.
While acknowledging the importance of risk mitigation, it is worth noting that risk premiums have their limits, and Alibaba might have already surpassed that threshold. With the company’s financials displaying robust growth that is not fully reflected in its stock performance, Alibaba could present an attractive proposition for investors eyeing substantial returns.