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Alibaba has 1 hidden monster

Ali Baba (BABA -5.00%) has taken steps that could revive an IPO of its stake in Ant Group. His earlier attempt to take the company public achieved a tremendous valuation. Though the IPO was pulled off the table, Alibaba still owns a significant stake in the valuable company. Here’s what’s happening now.

Hidden Gem

Ant Group operates a digital payment app branded Alipay. The company was founded by Jack Ma, who also founded Alibaba. Alipay’s 1.3 billion users transact on Alibaba’s e-commerce sites and anywhere that accepts mobile payments. The app also allows users to access their money market fund, buy it now, pay later service and online banking. Alibaba owns 33% of Ant Group.

Image source: Getty Images.

In 2020, Ant planned to go public as a standalone company, which would have valued the fast-growing company at over $300 billion. At that time, the Ant Group would have been larger than US banks Wells Fargo and Goldman Sachs.

Unfortunately for Ant shareholders, the IPO was scrapped at the last minute by the Chinese government, which began imposing sweeping regulations on Chinese tech companies like Ant, which provide financial services but aren’t regulated like financial institutions. Many Chinese stocks, including Alibaba, started a steep fall. Alibaba shares have fallen from over $300 per share in October 2020 to their current price of around $90.

Recently, however, the People’s Bank of China accepted an application from Ant to establish a financial holding company. Their acceptance of the filing could indicate that Ant is now compliant and could set the stage for another attempt at an IPO.

At the center of the controversy is former CEO and founder Ma. The charismatic figure owns 50.52% of Ant Group and a majority stake in many of Alibaba’s other subsidiaries. The Wall Street Journal reported that Ma plans to relinquish control of Ant Group. That way, regulators could no longer view Alibaba and Ant as joint control, and Chinese regulators could look favorably on an Ant Group IPO.

Is Alibaba Stock a Buy Right Now?

If Ant Group is worth over the $300 billion it was valued at before its ill-fated IPO, Alibaba’s one-third stake would be worth about $100 billion. Additionally, Alibaba’s core businesses include its popular e-commerce platform and fast-growing cloud business, which accounts for 5% of the global cloud market.

Overall, Alibaba reported net income of $9.7 billion for its fiscal year ended March 31, 2022. So, using its five-year average P/E of 32 as a proxy, Alibaba should be valued at $310 billion. The addition of the company’s $100 billion stake in Ant Group would bring Alibaba’s total value to about $410 billion. Alibaba’s current market cap is just $275 billion, which could represent a significant value opportunity for shareholders.

Chinese fintech regulation was a cause of the stock price decimation, but it appears those issues are behind the company. The shareholders are now wrestling with a possible delisting of Alibaba shares from the American stock exchanges. The problem with delisting is that many large institutional investment firms cannot own shares in companies that are not listed on a major exchange.

Many of these investors may already be out of stock, presenting an opportunity for individual investors to hold shares when switching to the OTC markets or overseas exchanges. An Ant Group IPO could be a catalyst for the market to realize the hidden value in Alibaba’s shares and potentially prevent them from being delisted.

Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. BJ Cook has no position in any of the stocks mentioned. The Motley Fool has positions in Goldman Sachs and recommends Goldman Sachs. The Motley Fool has a disclosure policy.

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