In a major reversal, Yahoo! (YHOO) agreed to upend its restructuring strategy. The company now intends to maintain its $32 billion stake in Alibaba Group Holding (BABA) and then spin out the other assets into another entity.
The reason: the original plan would have likely created too much uncertainty, especially with the potential tax consequences.
In other words, YHOO’s move was not necessarily a bull call on Alibaba stock.
Now granted, the company has certainly built a massive ecommerce platform in China, with about 61% of the market. Oh, and of course, the growth metrics continue to be standout (making Yahoo look like a has-been). In the latest quarter, revenues shot up by 32% to $3.49 billion.
BABA also remains highly profitable, with the adjusted net income coming to $720 million. In fact, the company has also been making a successful transition to mobile.
But none of this has impressed Wall Street. Consider that during the year so far, Alibaba stock is off about 20%.
Then again, the company certainly faces some troubling issues.
BABA Stock’s Problems
For example, there is the constant buzz about counterfeit goods on the various ecommerce platforms, which has certainly weighed on Alibaba stock. Even co-founder Jack Ma has called the situation “a cancer we have to deal with.”
Let’s face it, marquee brands will likely be hesitant in dealing with BABA if things do not get better. And as seen with companies like Nike (NKE) and Apple (AAPL), these kinds of high-end companies continue to get lots of traction with Chinese consumers.
Next, Alibaba stock is also likely getting knocked because of the seemingly chaotic dealmaking strategy. While it’s true that some of the deals have made lots of sense, such as those that have bolstered mobile, there are certainly others that are head-scratchers.
Hey, what’s BABA doing owning a soccer club or even a film studio? Hey, just this week the company also purchased the South China Morning Post, which is a local English-language newspaper.
Keep in mind that BABA has been fairly liberal with its wallet when it comes to its dealmaking. Based on data from Dealogic, BABA has struck 47 acquisitions since 2014 for a total value of nearly $24 billion.
The problem — especially for Alibaba stock — is that management could easily get distracted.
Actually, this could make it tough to deal with the emerging competition. And the rival that perhaps is the biggest threat is JD.com (JD). Unlike BABA, which relies on an eBay (EBAY)-style marketplace approach to ecommerce, JD.com is more like Amazon.com (AMZN). That is, there is a massive infrastructure of warehouses and a logistics system to inventory merchandise and provide shipping. Even though it is expensive, there is generally faster delivery and better control over quality (yes, such as with counterfeits).
And JD.com has another big advantage, which could put increasing pressure on Alibaba stock. The company has partnered with Tencent, which operates the biggest Internet/mobile social network in China, WeChat. Already JD.com is seeing a nice boost from the traffic. In fact, the company gets about a third of new customers from WeChat.
And finally, another nagging problem for Alibaba stock is the deceleration of the Chinese economy. During Q3, growth came to about 6.9%, which was the slowest since the global implosion of 2009. Unfortunately, things could easily get worse. If anything, the plunge in commodities prices is a tell-tale sign — China is the biggest buyer of major industrial commodities like copper and steel.
Bottom Line for BABA Stock
So while BABA stock may look somewhat cheap right now, with a price-to-earnings ratio of 22, investors should still be cautious. There are a variety of headwinds that could mute growth, as seen with the growing competition, problems with counterfeits and the softness of the Chinese economy.
In other words, for now it is probably best to stay away from Alibaba stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
