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Actions in Alibaba Holding Group (NYSE: BABA) and AMC Entertainment Holdings (NYSE: AMC) are popular among retail investors, ranking in the top 100 widely held on the Robinhood Markets Platform. But despite the hype, both companies carry a high level of risk that could leave investors badly burned. Let’s explore how aggressive regulation in China and poor fundamentals could put downward pressure on both companies.
1. Alibaba
I was previously bullish on Alibaba shares due to its dominant position in Chinese e-commerce and its compelling valuation (now only 18 times earnings eventually). However, the collapse of China’s second-largest real estate developer, China Evergrande Group, highlights an alarming level of regulatory uncertainty in the country, and Alibaba is already on the chopping block.
Image source: Getty Images.
In August 2020, China introduced its “three red lines” policy, which limited leverage ratios for real estate developers. The new rules have helped unravel Evergrande’s debt-fueled business model, putting it at risk of a spectacular flaw. That said, Alibaba is not Evergrande. And I hesitate to pretend that China is purposely downsizing its largest companies. But that’s what seems to be happening, and the crackdown is already eroding Alibaba’s economic moat.
In September, Beijing plans expressed to break up Group of ants‘s Alipay and create a separate app for its lending business. This change would be a blow to its business model, which presents itself as a one-stop-shop for online payments and traditional financial products. This operating model allows Ant Group to capture efficiencies and synchronize user data.
Alibaba owns 33% of Ant Group, which was previously scheduled to go public at $ 313 billion at the end of 2020. Ant’s estimated valuation has now fallen to $ 144 billion, according to Fidelity. And it could fall further if the new regulations come into force. To put these numbers into perspective, Alibaba currently has a market cap of $ 432 billion. And while the company’s core business remains strong (with total revenue growth of 34% year-over-year to $ 32 billion in fiscal first quarter), shares are down. by 38% since the start of the year in response to intensifying regulatory challenges.
2. AMC Entertainment
In September, AMC Entertainment decided to accept crypto-currency Dogecoin for online payments after CEO Adam Aron asked his 174,000 Twitter followers for advice. AMC seems to embrace the memes community that keeps its stock bloated. But the hype doesn’t make up for the fundamentals, and the company’s finances are still in shambles.
At $ 445 million, AMC’s second-quarter sales are still down 70% from this period in 2019 (before the pandemic). And the company is still losing money with an operating loss of $ 297 million over the period. This is an improvement on the $ 472 lost in the period of the previous year, but nowhere near enough to run the business without the need to raise capital through debt or shares. additional. With $ 1.8 billion in cash in the second quarter, that won’t be a problem – for now.
But the picture is not all gloomy. According to management, AMC expects to achieve positive cinema-level cash flow by the fourth quarter, assuming a domestic box office of at least $ 5.2 billion this year. Walt Disney‘s The decision to release the rest of its 2021 films exclusively in theaters could help AMC stick to its directions.
These positive trends could have made AMC stock a viable investment for risk-tolerant investors if its valuation was reasonable. But with a market cap of $ 21 billion, the stock is trading for a tempting premium over its pre-pandemic valuation. As of early January 2019, AMC had a stock price of just $ 12 and a market cap of around $ 1.5 billion. It’s hard to see what could make the company 14 times more valuable today than it was before the crisis.
Blowing in the wind
The worst part about Alibaba and AMC Entertainment is that some of their biggest challenges are beyond management’s control. Alibaba cannot stop Chinese government regulation. And AMC depends on movie studios that create content for theaters to get people to its theaters. That said, Alibaba’s relatively low valuation could potentially limit its downside risk. AMC, on the other hand, has a lot more leeway.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool owns shares and recommends Alibaba Group Holding Ltd. and Walt Disney. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
