In October, the many Chinese holidays slowed the flow of negative news that often hurts Alibaba Group (NYSE:BABA) stock the most. China celebrated the National Holiday for the first week of the month. A few weeks later on Oct. 13, the Hong Kong stock exchange closed due to Typhoon Kompasu.
BABA stock benefited from the lack of negative news. It bottomed at $138.43 and then staged a massive rally. Now that Alibaba is trading above key simple moving averages, investors may consider Alibaba again. It has two positive catalysts that may accelerate the positive momentum.
Catalysts for BABA Stock
South China Morning Post reported that Alibaba has been developing server chips. Alibaba based its server processors on technology from Arm Holdings. In 2018, it caught up to competitors developing artificial intelligence solutions by making custom chips. In China technology giants like Huawei and Baidu (NASDAQ:BIDU) already build chips in-house.
Alibaba started chip design in 2019. When manufactured, they will use the 5-nanometer process. This will rival semiconductor chips that of Taiwan Semiconductor’s (NYSE:TSM) production. Still, TSMC is developing 2nm. In 2022, it has 3nm and 4nm planned. TSM is a highly competent firm. It is confident that it will have such node processors ready. TSM aggressively increased its capital expenditure budget to achieve that ambitious plan.
Alibaba’s in-house chip design efforts will lower its capital requirements. The e-commerce giant needs to save money any way it can. Last month, it generously invested $15.5 billion of shareholder money by 2025 in support of China’s “common prosperity” initiative. China has a growing disdain for the wide gap between the common poor and the rich people and wealthy firms. Chinese technology firms needed to appease the Chinese Communist Party (CCP) to avoid further regulatory headwinds. For example, China fined food delivery giant Meituan (OTCMKTS:MPNGF) with a $534 million antitrust fine.
Investors reacted to Meituan’s fine favorably. They expected a bigger punishment. This lifted BABA shares by 8% in Hong Kong trading on Oct. 11.
Jack Ma Sighted
On Oct. 20, two Spanish newspapers reported that people spotted Jack Ma in Mallorca. Not only is this the first report of his trip abroad since 2020, but it is the first time he has been spotted in public in months. Alibaba investors may interpret the sighting as a positive signal that the CCP is relaxing its crackdown against the company.
Jack Ma is no longer the chairman of Alibaba. But since he is the founder, the public will associate him with Alibaba’s rise and fall. The CCP punished him severely after he pushed back against Beijing. Still, he should get credit from President Xi for speaking out against the widening wealth gap and shrinking opportunities for the youth in China.
BABA Is a Value Stock
Markets rewarded investors who bet on the CCP relaxing its regulatory crackdown on Alibaba and e-commerce firms. BABA shares bounced from lows. Its stock scores of no lower than 71/100 would justify the recovery. Based on the price-to-earnings of around 20 times, the stock scores a modest value score.
Conversely, Alibaba trades at a price-to-sales of 4.06 times. This is higher than that of Amazon (NASDAQ:AMZN) at 3.86 times.
Alibaba offers strong quality and growth and fair value.
Thanks to its strong e-commerce business, retail channel strength on desktop and mobile, Alibaba scores a 95/100 on quality. It offers investors a strong return on investment.
Risks for BABA Stock
China’s unusually high number of holidays and stock market closures on the month may have delayed more crackdown news. The Chinese government is unforgiving to people who speak out against it.
The CCP may resume issuing more regulations. The new policies starting on Nov. 1 could lead to weakening revenue and operating profits. Alibaba may need to invest more in the business, hurting margins.
Cautious investors could wait beyond the current quarter. Markets will price the new privacy regulations that will hurt e-commerce firms. Alibaba may lower its outlook when it posts its next quarterly earnings. This will hurt BABA shares, creating a better, discounted price for investors who missed the recent bounce.
Alibaba is not yet out of the political cross hairs. It is getting close. When it does, the stock will stage a steady recovery instead of a temporary bounce that only benefits speculative traders.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.