Alibaba‘s (NYSE:BABA) stock recently plummeted after the company was hit by a triple whammy of antitrust actions. First, China’s SAMR (State Administration for Market Regulation) fined Alibaba for its unapproved takeover of the department store chain InTime Retail.
Just over a week later, the SAMR launched an antitrust probe into Alibaba’s e-commerce business and its use of exclusive deals to lock in merchants. The agency also summoned Ant Group — Alibaba’s fintech affiliate, which originally planned to go public in November — to a regulatory meeting.
Those three blows erased nearly all of Alibaba’s gains from 2020. Are investors overreacting to the headlines, or could the SAMR cause big headaches for China’s top e-commerce and cloud company?
Investors should have seen this coming
CNBC’s Evelyn Cheng recently said the actions against Alibaba were “largely unexpected,” but the writing has been on the wall for a very long time.
The SAMR introduced anti-monopoly laws back in 2008, but those rules mainly targeted foreign firms and barely affected domestic tech giants like Alibaba. But at the beginning of 2020, the SAMR announced it would amend those rules to crack down on domestic companies.
In April, the SAMR drafted tougher rules for big acquisitions. In November, it drafted additional rules that would target price discrimination, exclusive deals for merchants on online marketplaces, and the compulsory collection of user data. All those drafted rules seemed to target Alibaba.
Meanwhile, Alibaba co-founder Jack Ma fell out of favor with the Chinese Communist Party (CCP) despite being a registered member. Ma frequently criticized the CCP’s policies, and his recent critique of China’s banking systems reportedly caused regulators to suspend Ant’s eagerly anticipated IPO. All those developments were bright red flags for Alibaba’s investors — so they shouldn’t be surprised by its recent antitrust reckoning.
Alibaba’s rivals have complained for years
Over the past three years, JD and Pinduoduo have complained about Alibaba’s use of exclusive deals to lock in merchants. Merchants that listed their products on Alibaba’s Tmall were reportedly penalized with demoted listings and bans if they sold the same products on JD and Pinduoduo. Therefore, the SAMR’s crackdown on exclusive e-commerce deals isn’t too surprising.
Should investors be concerned?
Two of the three recent developments won’t hurt Alibaba that much. First, the SAMR only fined Alibaba 500,000 yuan ($76,548) for its unapproved takeover of InTime Retail, which is a drop in the bucket for a company expected to generate $107.4 billion in revenue this year.
Nonetheless, the symbolic fine could make it tougher for Alibaba to expand its brick-and-mortar business, which complements its e-commerce marketplaces, enhances its logistics network, and tethers more shoppers to Ant Group’s Alipay payments platform.
Ant Group’s suspended IPO could have generated a lot of cash for Alibaba, which owns a third of the rapidly growing fintech company. Additional restrictions against Alipay could also soften its defenses against its primary rival, Tencent‘s (OTC:TCEHY) WeChat Pay.
Alibaba’s stake in Ant generated 7.72 billion yuan ($1.12 billion) in investment profits, or 10% of its net income, in the first half of fiscal 2021. The value of that stake would have risen significantly after Ant’s IPO, but it also won’t decline simply because the offering was suspended. Instead, Alipay will likely maintain its duopoly with WeChat Pay in China.
The only SAMR move that could significantly hurt Alibaba is an outright ban on exclusive deals with merchants. Alibaba generates most of its revenue and all of its profits from its core commerce business, and the elimination of those prisoner-taking deals would allow brands to cross-list their products on JD, Pinduoduo, and other smaller e-commerce marketplaces.
Alibaba has already been relying on lower-margin businesses — such as brick-and-mortar stores, direct sales channels, cross-border e-commerce platform, and its Cainiao logistics affiliate — to offset the slower growth of its massive Taobao and Tmall marketplaces. New restrictions could exacerbate that pressure.
The key takeaways
Some investors might dismiss the SAMR’s actions as short-term headwinds. However, these actions have been telegraphed for nearly a year now, and the agency seems dead set on curbing Alibaba’s growth.
Alibaba trades at 17 times forward earnings, which is a low valuation compared to its estimated earnings growth of 37% this year and 21% next year. The stock looks cheap at these levels, but I would stay away until the SAMR’s new restrictions are finalized and we can fully gauge the financial impact. Until then, we shouldn’t trust analysts’ forecasts — most of which were made before the government set its sights on Alibaba.