Shares in Alibaba have experienced a surge in value following reports that the company’s co-founder and former CEO, Jack Ma, has been buying up shares. While this could be seen as an endorsement of Alibaba’s growth potential, there is a possibility that Ma could be falling into a value trap that has caught other investors in recent years.
According to a report from the New York Times, Ma has acquired $50 million worth of Alibaba’s Hong Kong-traded stock in the last quarter. Additionally, Alibaba chairman Joe Tsai’s family office reportedly purchased nearly $152 million of the U.S.-traded shares last quarter, as confirmed by regulatory filings.
Both Ma and Tsai are already significant shareholders in Alibaba. However, news of their recent purchases has given the stock a boost. On Tuesday, the stock finished 7.9% higher and continued to advance by 1.8% in U.S. premarket trading on Wednesday.
The Struggles of Alibaba: A Value Trap for Investors
Shares in Alibaba have experienced a significant decline over the past couple of years, plummeting approximately 75% from their peak in late 2020. The tech giant has been at the center of a crackdown by Chinese regulators, compounded by pressures from Washington, D.C. Unfortunately, a hoped-for rebound in 2023 was derailed by China’s economic slowdown, which adversely affected consumer spending.
In a symbolic blow to Alibaba, it recently lost its status as the most valuable Chinese online retailer to PDD, the owner of Pinduoduo and Temu. PDD has achieved remarkable success by attracting consumers to its budget-friendly platforms.
While Jack Ma‘s reported decision to double down on Alibaba stock may be viewed as a vote of confidence, some believe that the Chinese billionaire might be falling into a familiar value trap that has plagued the company’s shareholders.
Despite being viewed as extremely undervalued based on multiple financial metrics, Alibaba’s stock has consistently failed to recover. Although management has delivered impressive results in recent quarters, concerns persist among U.S. investors regarding the investability of Chinese companies. Beijing’s regulatory warpath, which persisted for approximately two years, has created an uncertain regulatory environment that poses a difficult-to-quantify regime risk for Alibaba shares.
Nevertheless, Wall Street analysts still hold a positive view on the company. Based on a survey conducted by FactSet, the overwhelming majority rate Alibaba as a Buy, with only one recorded Sell rating. The consensus target price implies a potential upside of over 50% from its current trading levels.
Investing with Patience
As a seasoned copywriter, I understand the allure of attractive stocks. However, it’s essential to acknowledge that investors like the late Charlie Munger have patiently awaited the fruition of bullish predictions for years.