Both the US and China markets have well known big tech stocks. Among the Chinese big tech companies, Alibaba is the stock that most investors think of when they think of an underperformer. In the US big tech space, this would be Meta.
Both stocks have fallen nearly 80% from their highs, Alibaba down 79% since October 2020 and Meta down 76% since September 2021.
The large share price decline has left many investors wondering if it is time to buy these two stocks. For investors who are stuck holding, the question then is whether one should hold or sell.
3 Reasons to Buy
1) Strong and wide economic moat
We previously wrote about 5 types of economic moats. Both companies still dominate the respective market in which it operate in.
For Alibaba, despite repetitive COVID-19 lockdowns and the Chinese regulatory crackdown, it still commands a significant proportion of the Chinese commerce market with more than 1 billion annual active consumers (AAC). It also has more than 300 million AAC internationally under Lazada and Trendyol. Alibaba is also strengthening its flywheel further with growth in both its Cloud and Cainiao segments.
Facebook still has a firm grip on social media with nearly 3 billion daily active users and nearly 3.7 billion monthly active users across its main platforms, namely, WhatsApp, Facebook, Messenger and Instagram. Meta’s main source of revenue is advertising on its main platforms. Meta is widely regarded to be one half of this digital advertising duopoly, with the other half being Google.
Meta also has a Reality Labs division which includes augmented and virtual reality related consumer hardware, software, and content and where Meta is investing heavily into developing the Metaverse.
2) Growth potential
Alibaba has a few growth segments. Making up a big part of its international e-commerce division is Lazada, Alibaba’s Southeast Asian e-commerce subsidiary and is the cornerstone of its international e-commerce growth strategy. In 2022 alone, Alibaba has invested nearly US$1.3 billion into Lazada with a target of increasing its gross merchandise value by five folds to US$100 billion with 300 million users. Lazada will also expand into new markets such as Europe.
Cloud is a growth segment for many big tech companies such as Amazon, Microsoft and Tencent. It is the same for Alibaba. In September 2022, Alibaba pledged to invest $1 billion in the next 3 years to support its cloud computing customers.
For Meta, the biggest growth potential and also the largest uncertainty is its investment into developing the Metaverse. The total investment and potential upside have not been meaningfully quantified at this stage but many are excited over Mark Zuckerberg’s plans and focus.
Many believe that Meta is inadequately monetising its existing suite of offerings and expect the company to roll out new and additional monetisation tools on Instagram and Facebook. We think such additional monetisation will be limited and not share the same excitement as many others as we believe that Meta would have already monetised the platforms further if they could.
3) Low Valuations
We have presented a table below of the key metrics. One can see that the valuations are low.
We have also included data on the 5 year averages. The 5 year averages merely serve as reference point as both companies would have since progressed from a growth company to a more mature set up where they are measured on their profitability.
| Stock metric (times) | Alibaba | Meta |
| P/S | 1.5 | 2.0 |
| Average P/S (5y) | 8.7 | 8.1 |
| P/E | 31.9 | 8.2 |
| Average P/E (5y) | 34.1 | 25.6 |
| P/B | 1.3 | 1.9 |
| Average P/B (5y) | 5.6 | 5.9 |
| EV/EBIT | 7.1 | 6.0 |
There are also some uncertainty over the future growth and profitability of these two companies, hence we have looked at some the revenue and earnings growth forecast expectations by analysts. We can see that the revenue growth is lacklustre for both companies. Analysts seem to expect significant earnings growth for Alibaba which could be an indicator of fundamental bottoming while lowered profitability is forecasted for Meta, which could be attributed to the company’s investments on the metaverse.
| Forecasts | Alibaba | Meta |
| Revenue growth | 5.4% | -1.5% |
| EPS growth | 131.8% | -32.5% |
Why hold?
First and foremost, Investors should hold continue to hold these stocks only if they remain comfortable. Alvin addressed the question on whether you should quit China stocks here. I believe the same principles applies to Meta.
Even though the stock price bottom could be near and there could be a turnaround in corporate profits soon, marking a fundamental bottom, an investor should take a disciplined approach to investing based on his/her own convictions. This does not mean that you should sell the stock immediately but take the opportunity to exit on rebounds and do not blindly follow someone else.
3 Reasons you should Sell
1) Could the Moat be Shrinking?
Alibaba and Jack Ma are the face of the Chinese regulatory crackdown and competitors such as JD.com have seized the chance to grow its market share. Alibaba was hindered as it had to focus more of its efforts and financial firepower on regulation and common prosperity instead of growth in all its segments so as to strengthen its flywheel.
Meta has admitted it is facing unprecedented competition from Tiktok and have been slow to react to newer trends in social networking which contributed to the success of its rival, Tiktok. In addition, Meta is significantly impacted by Apple’s privacy changes which would reduce Meta’s ability to build better profiles of consumer groups and use them to help advertisers more precisely target their ads.
2) Both companies have faced political backlash
Alibaba, being the first company to face Chinese regulatory crackdown is viewed by some investors as damaged goods due to the presence of Jack Ma. Some investors expect Alibaba to continue to face higher levels of difficulty in carrying out strategic acquisitions as compared to its competitors.
Meta, together with the other FAANG stocks have faced US senate and congress inquiries over market power and a variety of other issues such as the influence on children and fighting scams. Meta in particular has been grilled much more than others due to the negative light in which social media is regarded.
3) The worst may not be over
The current macroeconomic situation is one characterised by inflation led interest rate hikes and the geopolitical situation is one of continuing Russian-Ukraine conflict. Both companies have been affected by slowing economic growth, partly contributed by these two factors.
Alibaba said they have seen strong sales for the first checkout window of this year’s Singles’ Day shopping festival, but a third of consumers surveyed said they expected to spend less on the event this year.
Advertising has always been a cyclical industry, Meta has also seen advertisers tightening their budget on Meta’s platforms in the face of lower consumer spending and this was made worse by Apple’s privacy changes.
What we think
Needless to say, there is always a reason why certain stocks are cheap. We have provided reasons why one can consider buying, holding or selling the stocks. We think that investors should buy or hold the stocks but size them appropriately due to the prevailing risks explained under the hold and sell sections.
Looking at a technical perspective, when we look at the weekly charts, both stocks are clearly in a down trend and below their moving averages. The stocks have broken through numerous support lines, with RSI near trough levels. MACD indicators also do not look good.
Although there could be glimmer of hope from a daily chart when these stocks start to clock a few days of positive performance, one should always be reminded to look at the broader trend and wait for the charts for these stocks to present bullish indicators first as catching a falling knife could be extremely painful.
Closing statements
With both Alibaba and Meta seeing nearly 80% decline in share prices, it has probably been a long time ago since these two men were seen smiling in public. Also perhaps a little surprisingly, Meta was the stock that took a faster path down, taking 14 months to decline 80% as compared to Alibaba which took 25 months.
We have provided a couple of reasons why these two stocks could be a buy due to its strong economic moat, growth potential and cheap valuations. Of course, there are reasons for the sharp declines such as a potentially shrinking moat and political backlash. The worst may not yet be over as well.
For investors who currently hold either of these two stocks and are assessing their positions, they should first look back as to why they invested in the company and whether these factors still exist. One should continue to hold these stocks only if they remain comfortable based on their investment principles.
