Table of Contents Hide
2023 stood out as a great year for global stocks, unleashing strong rallies across the U.S., Europe, Japan, and India. Yet, the same sentiment wasn’t felt in China. In fact, Chinese and Hong Kong stocks ended 2023 as the world’s worst-performing equity markets.
While this bad performance can be blamed on the various issues with China’s economy, such as the real estate crisis, weak consumer spending, and high youth unemployment, there’s no denying that China’s government is also to blame, with its unpredictable regulatory crackdowns that caused many tech companies’ valuations to sink.
One of these tech companies is the e-commerce titan Alibaba (NYSE: BABA), which saw a terrible year full of setbacks thanks to China’s policies and its tense relations with the U.S., and that led BABA stock to close the year at a valuation near its 52-week low!
Despite this, Alibaba still has a chance to turn its fate around. There are several catalysts that make BABA stock look like it’s set for a rebound in 2024, and as it slips close to its lowest-ever valuation, now could be the perfect time to buy BABA stock.
Chinese Stocks Bad Performance
When we say that 2023 was a bad year for Chinese stocks, we really mean it. China’s blue-chip CSI 300 index fell more than 11%, hitting five-year lows. Meanwhile, Hong Kong’s Hang Seng fell almost 14%, marking its first four-year losing streak since its launch in 1969.
This terrible performance would’ve been unbelievable at the beginning of 2023 when investors were excited about Chinese stocks because Beijing abandoned its strict Zero-Covid policies and was opening up again in late 2022, so investors expected a quick economic recovery.
However, the rebound they expected didn’t come, and Chinese stocks failed to gain momentum because of a long list of challenges, including a slowing economy and a sluggish demand that created a risk of a deflationary spiral.
In addition to China’s own economic problems, the country’s regulatory landscape and relations with the U.S. worsened in 2023, especially harming Chinese tech stocks listed on U.S. exchanges.
BABA Stock Background
One such stock is BABA stock, which is currently nearing an all-time low valuation. This would’ve been unbelievable 10 years ago, when the Chinese company first went public.
Alibaba was at its peak when it went public in 2014. Then, it became the de facto e-commerce company in China, a leader in the country’s technology industry rivaled only by Tencent, and its prospects for growth seemed unlimited.
But now, most investors avoid BABA stock. The landscape of the market changed completely, and Alibaba now faces severe competition from companies like Pinduoduo (NASDAQ: PDD) and Douyin (NASDAQ: DOYU).
It’s also no longer among the top-two technology companies in China by market cap. But, above all, long-term investors have suffered with the share price sinking to around $70 today, not far from its IPO price of $68.
BABA Stock’s Declining Valuation
There are multiple factors that contributed to Alibaba’s sinking valuation. Still, they all lead back to 2020 when Alibaba’s co-founder and former executive chairman, Jack Ma, publicly criticized China’s financial regulators and Chinese banks and accused them of stifling innovation.
As a result, the Chinese authorities pulled the plug on Alibaba’s affiliate financial services company Ant Group’s $37 billion IPO in November 2020 and ordered the company to restructure its business.
This ended the company’s plans for a dual listing in both Hong Kong and Shanghai, which would have been the biggest IPO in history. Ant Group was also fined $984 million by the regulators. Failing to take Ant Group public took a heavy toll on Alibaba’s valuation, with the combined market cap losses of the two companies reaching $877 billion.
After this instance, it seemed the regulators had completely turned against Alibaba. Beijing launched an antitrust investigation into the company and determined that it had abused its position as the market leader for years. As a result of the investigation, Alibaba was fined $2.8 billion and forced to change its algorithm for ranking search results.
By 2023, Alibaba had the Chinese government against it, was forced to pay billions in lawsuits, lost market cap to competitors, and was worth around a quarter of its peak valuation at more than $800 billion.
Why BABA Stock could Rebound
The company’s management knew it had to act, and its response was a complete restructuring of its business.
Alibaba split into six independently run companies that would seek separate IPOs, dismantling Jack Ma’s business empire. This was Alibaba’s way of leaving the Jack Ma era behind, and the company’s strategy to combat rising competition by speeding up decision-making and allowing each division to focus on growing itself.
But, it seemed like restructuring the company still wasn’t enough, as Alibaba was forced to cancel the spinoff of its $11 billion cloud computing business, Alibaba Cloud, in November, thanks to the tense U.S.-China relations and the trade war between the two countries that led to investigations and curbs on the technologies traded between the U.S. and China, especially chip technologies.
When Alibaba announced the cancellation of the spinoff, it cited uncertainties created by U.S. export curbs on chips used in artificial intelligence applications. As a result of failing to take Alibaba Cloud public, Alibaba’s market cap dropped by a massive $21.1 billion.
These problems have caused BABA stock to fall by more than 39% since its peak in January of 2023. However, some positive catalysts for BABA stock could lead to a rally in the future.
Alibaba has already taken a few steps to address and fix its problems. First of all, the company has restructured its business into six units and is looking to list them separately to create shareholder value and foster market competitiveness.
This would allow Alibaba’s businesses to become more agile, reversing the centralization Jack Ma started. It would help each business focus on its own growth and speed up decision-making in order to counter the increasing competition in the market and increase the company’s profitability.
Alibaba plans to give each business unit its own board and management team to run the business with total autonomy. It also changed its management team, replacing longtime CEO and chairman Daniel Zhang with new CEO Eddie Wu so Zhang could lead the company’s cloud computing business unit.
Alibaba’s management team also stated its commitment to increasing its investments in the company’s core businesses and the main drivers behind its growth, such as e-commerce, cloud computing, and logistics, which would allow it to improve the company’s profitability.
As the company focuses more on its core businesses, cloud computing and e-commerce, it will also monetize its non-core assets, which include $67 billion of equity securities and investments on its balance sheet, as well as other non-core operating businesses with low-growth or low returns.
This was good news for investors, as Alibaba monetizing its assets meant that it would be able to generate billions of revenue through assets that aren’t strategic to the business. It also offered the opportunity to pay investors dividends or give them more stocks. In fact, Alibaba has started paying dividends in the latest quarter.
Lastly, Alibaba is also spending billions of dollars in share buybacks, and repurchased $1.7 billion worth of its shares in the September quarter, leaving another $14.6 billion in its current buyback plan.
Alibaba has a lot of opportunities in the AI industry. This is because the company is expanding its footprint in the large language model (LLM) domain, which is a type of AI program that can recognize and generate text, among other tasks.
Alibaba Cloud has announced the open sourcing of its own LLMs, Qwen-72B and Qwen-1.8B. These releases are extremely important since they significantly widen the accessibility to advanced AI technologies in China.
Alibaba’s LLM models are known for outperforming industry benchmarks, which gives the company an opportunity for future growth as the global LLM market is expected to reach $40.8 billion by 2029, and having a leading position in the market would help Alibaba capitalize on this market growth.
In addition to developing its own AI models, Alibaba is also leading the cloud services sector in China with a 39% share, followed by Huawei Technologies and Tencent. Alibaba’s leading position in the Chinese cloud computing market provides it with many opportunities in a rapidly growing market. In fact, China’s cloud computing market is expected to reach $140 billion in 2025.
So, it’s obvious how Alibaba could see significant growth thanks to the rise of AI, especially when you consider China’s growing interest in the industry. The country even revealed plans back in 2017 to become the world’s leader in the industry by 2030.
China’s strong desire to become the global AI leader is shown in the amount it spent on AI projects in 2023 alone, which was around $15 billion, a rise of nearly 50% since 2021.
This heavy spending on AI will likely reach trillions of dollars, making AI a strategic driver of economic growth in China and indicating the large number of opportunities in the AI market for Alibaba, especially since the company is already one of its main players.
China’s Economic Recovery
Besides Alibaba’s AI prospects, the stock is expected to rally with other Chinese stocks thanks to the expected economic recovery in China.
The Chinese government has, in recent months, introduced a series of policies to attract investments to the country, as well as stimulus packages in order to revive its economy. The last financial injection by the Chinese government into the economy came in October 2023 in the form of sovereign bonds worth 1 trillion yuan, or $140 billion, in order to fund investment projects. It’s also likely that the government will focus on more fiscal steps to support growth into 2024.
President Xi Jinping’s New Year’s message made this clear, in which he acknowledged the recent headwinds the Chinese economy faced, and said that China would enhance the positive trend of its economic recovery in 2024, and sustain long-term economic development with deeper reforms.
The country’s banks are also taking action to counter the risk of deflation, with China’s central bank saying it would step up policy adjustments to support the economy and promote a rebound in prices.
Additionally, five of China’s largest state banks lowered interest rates on some deposits on December 22, which marked the third round of interest rate cuts in 2023. This could help the central bank move toward easing monetary policy.
China is also taking steps to better its economy, which includes heavy investments in research and development in order to develop new technologies and industries. The country now ranks second in the world in terms of total R&D spending.
The country also invests in creating special economic zones, where businesses can operate under more flexible regulations to attract foreign investment.Finally, the Chinese government has also implemented multiple policies to encourage domestic spending, such as tax breaks for homebuyers and subsidies for electronics consumers.
BABA Stock Forecast
Since it’s near its 52-week low, BABA stock could now provide a good investment opportunity once you consider factors such as Alibaba’s management’s plans to monetize the company’s less profitable assets to increase the value for shareholders, as well as the start of the dividend payouts at an indicated dividend yield of 1.26%.
Another important thing to consider is that Alibaba’s EPS will grow by a CAGR of 17.5% over the next five years and the fact that institutional ownership of BABA stock jumped by 100% in December 2023, a sign indicating the strong institutional interest in BABA stock as it fell to its 52-week low, which could mean that the stock is currently undervalued.
There’s also the prospect of China’s economic recovery. While it will not happen overnight, the Chinese government is taking multiple steps in the right direction to boost its economy.
With all of this in mind, and at its current price and valuation, it could be a great opportunity for investors who are interested in BABA stock as a long-term investment. However, investors should be aware of the risks of investing in Chinese tech companies, such as China’s unpredictable regulatory scrutiny, and the increased global and local competition in China.
BABA stock might be a promising opportunity for risk-tolerant investors who want a stake in China’s large and growing tech and AI market. If you’re interested in BABA stock, you might want to allocate only a small part of your portfolio, depending on your risk tolerance.
Please visit and read our disclaimer here.