I bought on the drop, plan to buy more if it drops more, here is my rationale:

 

The stock was undervalued prior to the drop, BABA has always carried a China discount, and given these regulatory challenges, it was a deserved discount.  Now with this drop the market is discounting a worse case scenario in my opinion.  The market cap dropped by a whopping $92.63B on the day.  To put that into context, the drop alone is more than the market cap of hundreds of S&P companies market cap. A truly horrific day for the stock. It dropped more than the market cap of Caterpillar, or almost as much as the market cap of Boeing.  This link lists the S&P 500 by market cap:  S&P 500 Companies List by Market Capitalization (liberatedstocktrader.com)

Re worst case scenario:  China will have to balance the actions it must take against Alibaba vs. going to far and damaging one of its company champions.  I tend to think that the exclusive vendor partnerships will be outright banned, Alibaba is likely to be penalize with a fine and will probably have to agree to closer supervision for quite some time. China risks capital flight if its seen as a country where companies can be dismantled if they offend the leadership, so that’s why I think it will go beyond this being the worst case scenario. I, however, could be totally wrong here, so take it with a large grain of salt.

The $92B question is what effect on margins will this have. That is certainly a hard question to answer, hence the mammoth market cap drop.  One could speculate that vendors will use this incident to get better terms, I doubt it will be a major hit to margins. The reason I think this way is because Alibaba is one of the go to places for the end consumer to shop on line.  Vendors know this, so I highly doubt they risk moving outright to either JD or PDD.  They will likely be on all three platforms. So it will be up to the consumer to decide where they shop. Bottom line, there will be more competition and a certain amount of margin pressure will come.

However, even with all of the above uncertainties, I come back to valuation:

1.        The forward PE has now dropped to 17.6 – one could adjust this upward by 5%, 10% etc. to discount for the potential margin impact.  A forward PE of 17 for a company growing at better than 30% is in any market a great value.

2.       The company had up until now been growing by 30%+ annually, so it traded at a discount to its growth

3.       In my opinion, the consumer mind share is unlikely to be dented significantly.  Humans tend to continue to do what they have done for years. So, its market share may remain intact or barely dented.

The other relevant question is how long will China take to review the case? I am going to guess that it will not take a decade like some of our anti-trust case take here in the US.  I would guess in the order of a year to two years, after all Xi Jinpin is likely judge, jury and executioner, so I would think he will make the relevant agencies move expeditiously.