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Is BABA Worth A Punt?

By Boris SchlossbergStock MarketsDec 17, 2021 04:06PM ET
www.investing.com/analysis/is-baba-worth-a-punt-200611992
Is BABA Worth A Punt?
By Boris Schlossberg   |  Dec 17, 2021 04:06PM ET
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Alibaba (NYSE:BABA) stock continues to sink after the company reported disappointing earnings in its Q2, and many investors have thrown in the towel on fears that what was once one of the preeminent Chinese internet stocks is damaged goods forever.

  • Recent earning miss exacerbated the drop
  • Company faces macro and geopolitical risk
  • But is highly undervalued relative to peers
  • Defined risk strategy may be the best way to trade it

The negatives against BABA are well known and should not be taken lightly. The company not only faces economic headwinds, but political pressure as well as it continues to feel the heat from regulators. In 2021, BABA was forced to pay a $2.8-billion fine, which negatively impacted earnings and, more importantly, remains vulnerable to further regulatory oversight as the Chinese authorities continue to exert more control over its affairs, especially the financial unit ANT, which was forced to cancel its IPO.

On the economic front, China is clearly experiencing a stealth recession as the stringent new regulations on ownership of real estate for investment purposes and the seeming default of the country’s biggest real estate developer Evergrande Holdings has severely curtailed the credit impulse, with some analysts suggesting that China may be experiencing its own version of the 2007 credit crisis.

Furthermore, the geopolitical conflict in the region remains inflamed as tension with Taiwan continues to escalate. Some market watchers expect Chinese military incursions into Taiwan air space to increase after the Beijing Winter Olympics. If that, indeed, turns to be true, the Chinese equity market could see a massive risk aversion move that would likely push BABA below 100.

So the risks are real and should not be minimized, yet the underlying operating business of BABA remains sound. The company has now pushed above the 1-billion customer mark and sales continue to expand at high double-digit rates. Furthermore, the company’s heavy investment into the cloud should begin to pay off as China quickly moves into the Internet of Things mode, with almost every device connected to some sort of surveillance mechanism allowing for a much more productive real-time framework to coordinate economic activity.

Meanwhile, BABA’s valuation is a fraction of its global peers, presenting an opportunity for value-oriented investors to establish a position at highly discounted rates. Still, the swirl of macro and geopolitical risks makes investing in the underlying stock a very risky proposition. Investors would be better served in a defined risk trade like buying the December 2022 120/150 call vertical currently trading at 10 and would pay out 30 if the stock rises above 150 by the end of 2022. 

Is BABA Worth A Punt?
 

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Is BABA Worth A Punt?

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Comments (4)
Wesley Loh
Wesley Loh Dec 18, 2021 7:37AM ET
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Some Joker still fancy about Chinese stocks. Look at what happened to Didi. Only a fool will buy into Chinese stocks now.
Satoshi Nakamoto
Satoshi Nakamoto Dec 18, 2021 6:58AM ET
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BABA is a clear buy now - unless you think that China will stop trading with the rest of the world.
Empire Destroyer
Empire Destroyer Dec 18, 2021 6:58AM ET
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wow and clearly buying Amazon cos they have so much soul e.g. treat their staff so well, doesn't promote hyper consumerism that increases waste and unnecessary buying, donating profits to save the earth and they have a mission to end global poverty... wow people buying must be saints and definitely going to heaven whilst all the ones buying. Baba going to ********.. ********is red after all so that lucky for Chinese people
Jan Chojnacki
Jan Chojnacki Dec 18, 2021 4:35AM ET
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don't forget about delisting threat
Satoshi Nakamoto
Satoshi Nakamoto Dec 18, 2021 4:35AM ET
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The risk of BABA delisting on NYSE is close to zero. And so what if it would and list on Hong Kong or somewhere else? You will keep your shares.
Marcus Berntsson
Marcus Berntsson Dec 18, 2021 4:35AM ET
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Baba already trade on HK, Adr can be switched for 9988. Hk shares. Delisting will most likely not happen.
bert prince
bert prince Dec 17, 2021 7:06PM ET
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it is not baba which is undervaluated...
Satoshi Nakamoto
Satoshi Nakamoto Dec 17, 2021 7:06PM ET
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A good argument could be made for that - then again, we will make money by selling BABA when it is overvalued like others presently are. I have no problem investing in BABA at this price.
 
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