Stock price of Alibaba Group Holding Limited (9988.HK) continues to drop… What should I do?

First of all this post is really my own thoughts and my own situation, and it might or might not relate to you.

To set the context: I first invested in Alibaba near the end of 2020 after reading up more on it.

Which is also in the context of:
a) The failed Ant IPO;

b) The State Administration for Market Regulation (SAMR) said in an online statement in Dec 2020 that it had launched a probe into the “choosing one from two” practice under which merchants are required to sign exclusive cooperation pacts preventing them from offering products on rival platforms.

At that period there were queries circulating in the media questioning about the whereabouts of Jack Ma as well. The sudden disappearance of the normally outspoken Jack Ma was linked to intense speculation about the escalating scrutiny over his internet empire by the Chinese authorities. It was only in 20 Jan 2021, that Ma’s re-emergence helped quell persistent rumors about his fate while Beijing pursues investigations into online finance titan Ant Group and Alibaba Group Holding. 

My intention was to take this as a long term holding in my stock portfolio (albeit still a small one), and slowly over time add to it. Basically a long term investing strategy.

That was then. Check out my thoughts then in the post below.

Alibaba Group Holding Ltd (HKG: 9988) share price crashed 26%. Is it worth buying? (read here)

Since then the share prices of Alibaba continue to be volatile, at one point it was much higher than my initial buy price. However, today it is trading in the red (slight unrealised loss).

There have been more ‘news’ since the end of last year.

Chinese tech stocks hammered as U.S. law threatens to delist firms from American exchanges (read here)

China’s dual-listed tech giants lost $60 billion in market value over three days as delisting threats loom (read here)

On 24 March 21, the U.S. Securities and Exchange Commission (SEC) adopted a law called the Holding Foreign Companies Accountable Act. Certain companies identified by the SEC will require auditing by a U.S. watchdog. These companies will be required to submit certain documents to establish that they are not owned or controlled by a governmental entity in a foreign jurisdiction. Chinese companies will have to name each board member who is a Chinese Communist Party official. Ultimately, the U.S. regulator could stop the trading of securities that fall foul of its rules.

The adoption of this law is on top of the stricter regulations happening in China as well.

Consequently, major dual-listed Chinese technology shares trading in Hong Kong were hammered . China’s dual-listed tech giants — Alibaba, Baidu, JD.com, and Netease — have collectively lost billions in market value in just days.

There is also the constant worry about the rising yield on the 10-year US Treasury note (which acts as a benchmark for global borrowing rates) or rather the unusual fast rate of increase, resulting in tech stocks sell off. Or rotation towards banks and value stocks from tech stocks.

The recent tech sell-off: Opportunity or a Wake up call? (read here)

Dow, Tech Stocks Rally As Treasury Yields Jump; Boeing At New Buy Point, While Tesla Slides (read here)

So there are ‘jitters’ through much of the tech stocks, not just highly valued speculative lost making tech stocks but also established mega techs like Facebook, Alphabet, Tencents, JD.com, Baidu etc… Some of them have more specific issues (eg. the battle between Apple and Facebook over privacy).

What did I do?

Basically there are 2 key things which I did.

Number 1: I relooked at my original thesis.

Sure there could be potential hiccups in the near term. However I do not feel that most of the news now are new (with reference to Dec 2020), and the fundamentals of the company remain strong. From a bottom up review, I feel that the thesis and the business of Alibaba remains intact. I believe it is a good compounder stock.

Yes the adoption of the Holding Foreign Companies Accountable Act is recent, however this was raised during the Trump administration period. So markets are well aware of this.

The scrutiny by the Chinese regulations is also a known factor and there are talks that the Ant IPO could go ahead, albeit at a lower amount and with more restrictions.

Ant Group IPO could get back on track if it resolves issues, China’s central bank governor suggests (read here)

Number 2: I have been spending less time tracking the stock prices, and in fact, I have been doing more binge watching of Youtube hahahaha. Just do something else.

Let’s face it, no matter how hard and how long we stare at the screens and at the stock prices, it will not change anything. It will not magically go up (or down, if we are shorting) as per our wishes. We are ultimately price takers. I would take the approach of waiting for the prices to drop below my target prices, rather than chasing prices (if it trends up).

I believe Alibaba is a quality company with a growing ecosystem. Alibaba is the largest e-commerce organization and the strongest brand operating as the leading intermediary organization in C2C, B2B and B2C segments, with 58% market share in China.

Alibaba Group is also the biggest company in China by market capitalisation, with a market cap of about US$597.2 billion (S$831.5 billion) at the time of writing.

One notable bright spot for Alibaba is cloud computing. Founded in 2009, Alibaba Cloud is China’s biggest cloud computing services provider, mainly focused on enterprise businesses.  The growth of Alibaba’s cloud business outpaced Amazon and Microsoft in the quarter ending in September 2020. That’s a 60% year-on-year rise and its fastest rate of growth since the December quarter of 2019.

In March 21, Alibaba Cloud launched its first personal cloud product Alibaba Cloud Drive, challenging established players like Baidu and Tencent Holdings in China. The service, which opened for public testing on Monday for both Android and iOS systems, offers users up to two terabytes of free storage and “unlimited” uploading and downloading speeds.

Alibaba cloud growth outpaces Amazon and Microsoft as Chinese tech giant pushes for profitability (read here)

Alibaba Cloud launches its first personal cloud product, challenging Baidu and Tencent (read here)

In gist

Ultimately, the key is to be patient and not to be myopic about the short term macro issues.

If its stock price drops further I may add on to my existing position.

The P/E ratio of the stock (HKG: 9988) on 28 March 21 is 26.03. The Price/Sale ratio is 6.12. Data taken from POEMS.

Historically and relatively speaking its valuation is not expensive.
If we want to compare its valuation over a longer period I would have to look at its US listed counterpart (Alibaba Group Holding Ltd ADR BABA), see below. Since it was only on November 2019, that Alibaba offered a secondary listing on the SEHK with ticker symbol HKG: 9988.

Yes, as per table below, Alibaba stock is still relatively inexpensive.

Of course, if it is from a trading strategy with a stop lost price, the approach will be vastly different.

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