Alibaba Group Holding Limited (BABA) is a leading Chinese multinational technology company, operating through four segments — Core Commerce, Cloud Computing, Digital Media and Entertainment, Innovation Initiatives, and Others. Its three main sites — Taobao, Tmall, and Alibaba.com — host millions of merchants and businesses.

The stock suffered a historic sell-off this month with the Chinese government’s escalating scrutiny of Jack Ma’s empire. China’s top antitrust watchdog, the State Administration for Market Regulation said through official online channels on December 24 that it has opened an investigation into BABA over its monopolistic practices. BABA’s shares could tumble further in the coming months owing to China’s broader efforts to rein in an increasingly influential internet industry.

Although BABA’s robust cloud platform and engaging user experience have driven it to a 3.6% gain over the past year, the regulatory challenges along with a few other troubling factors the company is facing have led our proprietary ratings system to rate the stock as “Neutral.”

Here is how our proprietary POWR Ratings system evaluates BABA:

Trade Grade: D

BABA is currently trading lower than its 50-day and 200-day moving averages of $277.34 and $246.20, respectively. This indicates that the stock is in a downtrend. Moreover, the stock’s 17.7% loss over the past three months reflects short-term bearishness.

BABA’s revenue has increased 30% year-over-year to $22.84 billion in the quarter ended September 30, 2020, primarily driven by its growth in revenues from customers in the Internet, finance, and retail industries. Its adjusted EBITDA has risen 28% from the year-ago value to $7 billion. However, its net income has declined 60% from the prior-year quarter to $4.24 billion.

Recently, the company has be subject to class action lawsuits filed by law firms including Pomerantz LLP, Jakubowitz Law, and the Klein Law Firm on behalf of the company’s shareholders.

On December 3, BABA announced that it revamped its hybrid cloud strategy to emphasize its compatibility, security, compliance, and reliability with its upgraded product offerings and Hybrid Cloud Partner Program. BABA has also launched a physical server to integrate its Hybrid Backup Recovery (HBR) solution with embedded backup capabilities to the public cloud. This could help the company grow its cloud computing business significantly.

Buy & Hold Grade: C

In terms of its proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, BABA is poorly positioned. The stock is currently trading at 30.5% below its 52-week high of $319.32, which it hit on October 27.

The company’s net revenue has grown at a CAGR of 43.7% over the past three years, while its net income increased at a CAGR of 29.4% over this period. BABA’s EPS has increased at a CAGR of 27.3% over the past three years. This can be attributed to the company’s strategic investments in the core commerce and cloud computing segments, broad supply chain network, and increased online purchases.

Peer Grade: C

BABA is currently ranked #22 of 115 stocks in the China group. Other popular stocks in this industry are Pinduoduo Inc. (PDD), Baidu, Inc. (BIDU) and Yum China Holdings, Inc. (YUMC)

All of these industry competitors have comfortably beaten BABA’s 3.6% gain over the past year. PDD, BIDU, and YUMC have gained 301.6%, 48.7%, and 19.3%, respectively, over this period.

Industry Rank: D

The China group is ranked #102 of the 123 StockNews.com industries. Even though China has been the only country to experience growth and a faster-than-expected economic recovery this year, the Chinese government’s digital market regulations and increasing scrutiny to curtail monopolistic behavior in the growing internet economy has adversely affected some of the leading companies in the China group.

In addition, the U.S. House of Representatives passed a bill on December 2 that could prohibit some Chinese companies from listing their shares on U.S. exchanges unless they adhere to U.S. auditing standards. This could represent another downside for some of the companies in this group.

Overall POWR Rating: C (Neutral)

Despite reporting strong performance in the core commerce and cloud-based business, BABA is rated “Neutral” due to China’s tightening regulations and other challenges as determined by the four components of our overall POWR Rating.

Bottom Line

BABA has been struggling over the past month, after Chinese regulators launched anti-monopoly draft rules to restrain entrepreneurs that enjoyed unusual freedom to expand their realms. The stock has suffered a record sell-off this month, and we think is likely to tumble in the coming months in the wake of a Chinese government antitrust investigation into the tech giant. Hence, it would be a wise to avoid this stock for now.

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BABA shares were trading at $220.92 per share on Monday morning, down $1.08 (-0.49%). Year-to-date, BABA has gained 4.16%, versus a 17.78% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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