Alibaba presents a potential regulatory opportunity
Alibaba presents a potential regulatory opportunity
Paul Gambles and James Fraser
We’ve been saying for the past two months that US Tech is overpriced and bubbly because tech stock prices have been ramped while related earnings have benefitted from Work-at-Home in a way that doesn’t look sustainable. The accelerated global shifts into digital and e-commerce look limited in terms of further growth once lock down restrictions are lifted.
On this side of the planet, we have China, that has managed to contain COVID-19 and there’s Alibaba (BABA), a tech stock that has fallen in price by 28% since the Chinese regulator put a sudden halt to the listing of Its online payment and financing subsidiary, the ANT Group. Regulators have previously warned Alibaba about its anti-competitive practices such as ANT forcing merchants to agree to exclusive deals which prevent them from offering products on rival platform. ANT also offers higher deposit rates to it users that Chinese state banks.
In our Outlook 2021, Paul says that “China is, in a much, much better place than the West, and above all China is much more focused on the long-term”. We suspect that the fall in the price of Alibaba is an opportunity to consider and can be accumulated in stages to capture any further price weakness.
Tencent is also facing similar increased scrutiny by the Chinese government, which is concerned about their growing size and power but Tencent hasn’t seen a significant dip in its share price. Chinese big-tech firms have invested in many assets, related an unrelated to their core businesses and this has resulted in huge increases in often complicated, related party transactions (as well as a continuous stream of asset reappraisals).
The Chinese government has become increasingly concerned with parts of ANT’s sprawling empire, particularly its lucrative credit related businesses. Despite conspiracy theories, we view that any regulatory clampdown is a positive for shareholders long term and will improve the transparency and direction of these firms (and the ability to describe what they actually do).
Internet chatter suggests that the real reason for the delay in the ANT IPO was was a talk Mr Ma gave in late October that was critical of China’s regulators and banking system.
Since then, tough new antitrust rules have also been introduced across the tech sector and have triggered a decline of about USD 140bn (GBP 103bn), or 17%, in the market value of Alibaba.
Alibaba’s payment system, known as Alipay, processes close to 50% of online transactions, helping it dominate Chinese e-commerce. Alipay’s financing arm provides small loans to Alibaba.com users and has attracted USD 93 billion in deposits.
Chinese tech companies aren’t alone with their monopolistic practices. Google and Facebook are squeezing competitors out of the marketing space with alleged, whopping 61% share of the global ad market. Greater online spending has also resulted in far better economies of scale helping the big US tech companies to sweep up the global online marketing business with their vast data pools, diverse and extensive global reach, size and financial resources.
The industry analyst WARC in its Global Advertising Trends Report, released last month, suggest that Google and Facebook’s share of the global online ad market will grow to 61.4% per cent this year, up from 56.4% in 2018. The duopoly’s USD176.4 billion in forecasted ad revenues amounts to a 22% increase on 2018. For everyone else, the future looks tough as internet advertising spend outside the duopoly is predicted to fall by 7.2%.
MBMG Investment Advisory has recently published an Outlook for 2021 which covers a number of topics besides US tech such as defensive and yielding, lower beta assets that may rise to shine again in 2021.
To request a copy of the MBMG IA 2021 Outlook – 2020 – They think it’s all over… please contact us at info@mbmg-investment.com
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About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
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