Shares of Alibaba Group (NYSE: BABA) have been sold off recently following fines from Chinese regulators for disclosure violations. After the fines were issued, Alibaba's shares dropped by 15%. The company's performance YTD is -12.26%, but some investors believe that the stock could end up rebounding to new heights, driven by newly announced stimulus packages and the release of pent-up demand following the easing of lockdowns in China's major cities. The thesis is that China's consumer spending recovery will mirror the United States' rebound after stimulus measures were introduced and lockdowns ended.
Shanghai, one of China's most important economic hubs, ended its lockdown on June 1. Beijing has been lockdown-free since May, but China's second and third-tier cities face continued disruptions. It's estimated that 41 cities in China are currently in full or partial lockdown, accounting for 22.8% of the country's GDP, aggravating a greater problem. China's economy has contracted sharply under lockdowns as GDP growth slowed to 0.4% in the second quarter. It's theorized these economic disruptions of COVID, along with its property crisis and recent mortgage boycotts, could sway Chinese authorities to adopt more measures of what's being termed "dynamic zero COVID," which gives local governments greater discretion in exercising measures to control the spread of the virus. At some point, the cost of a flat-lining economy and the rare appearance of civil disorder in the country could outweigh the benefit of keeping cities locked down to reduce case numbers, and that point may have been reached already.
An emergency teleconference was held on May 25 with 100,000 party members to discuss economic stimulus measures. The result of that discussion was a document outlining 33 policies the government will implement to get the economy back on its feet again. The policies included support for companies affected by the virus and strengthening the supply chain for basic necessities and resources. China's State Council also discussed more specific measures to boost domestic consumption in the face of COVID, which ties into the country's long-term vision and policies. China is far behind its GDP target of 5.5% this year, and its "Dual Circulation" strategy and "Common Prosperity" initiative depend on maintaining high levels of domestic consumption, which is apparently impossible under lockdowns.
The government's sharp pivot back towards its economic philosophies and a softening stance toward COVID is a very bullish sign for Alibaba, as it serves as a key conduit to China's internal consumption of products, with domestic sales making up 69% of its $134.56BN total revenue. In short, it seems that luck for Alibaba is finally on its side again as its macro backdrop improves dramatically, which will likely lead to a huge surge in sales for the company from several catalysts in China.
Alibaba Vs. Tencent Holdings Limited
Tencent Holdings (OTCMKTS: TCEHY) is one of Alibaba's main competitors in China and therefore warrants a comparison. Tencent has a larger market cap than Alibaba, with 404.63BN and 275.90B, respectively. The total return between the companies is disproportionate. The five-year return for BABA sits at -32.92% while TCHEY is 15.26%. BABA does not currently pay a dividend, while TCHEY has a dividend rate of $0.20 and a yield of 0.48%. On the EV/Sales ratio, BABA is a cheaper option at 10.21 compared with Tencent's 16.44. BABA's FWD revenue growth is also higher at 11.66%, and TCHEY's revenue growth is 9.98%.
