When I look at the analysis of my fellow InvestorPlace colleagues, I see a recurring pattern. They’re bullish on Alibaba Group Holding Ltd (NYSE:BABA), and exceedingly so. Dana Blankenhorn is on record saying that BABA stock will hit all-time highs. James Brumley believes that Alibaba stock will do the impossible — outperform Amazon.com, Inc. (NASDAQ:AMZN). I, on the other hand, am not too convinced.
This isn’t to say that I don’t think those metrics can’t come true. For example, I can easily see a case where the Alibaba stock price hits an all-time high. The markets are in a carefully optimistic mood right now. President Donald Trump, while still being the self-anointed king of Twitter Inc (NYSE:TWTR), is saying just the right words. Plus, the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI) is near double-digits year-to-date.
Therefore, don’t be surprised if BABA stock outduels AMZN for a few cycles.
So what is my issue with Alibaba stock? There are two concerns that I have: the first, a broader perspective that is rarely discussed, and the second, the lack of technical enthusiasm.
BABA stock Can Turn on a Dime
Let’s tackle the broader concerns, but to do that, I will need to wade into a politically sensitive area. Since our kindergarten and elementary school years, we’ve been taught that we are all the same. As we become adults, we find that such platitudes — while well-meaning — are not very helpful. People are different. And Asian markets are a lot different than American or western markets. Because of this, comparing BABA stock to an American counterpart is also not helpful.
The reason for this is that the gambling culture is so integrated in Asian cultures that it’s not really defined as a social problem. Only when Asian immigrants come to the U.S., for example, do gambling behaviors become quantified as problems. According to numerous Asian-American researchers interviewed by Psychology Today, individual cultures throughout Asia actively promote a gambling ethos.
What does this have to do with Alibaba stock? Investors need to be aware that BABA can make you rich, or it can make you poor in a hurry. This is especially true because we just saw a massive collapse in the underlying Chinese markets. Sure, the benchmark FXI is up over 10% this year. However, it’s also down more than 23% from its 2015 highs.
Plus, we’ve already seen this show before. Back in the late 1980s, many feared Japan would take over the world. This was one of the subtle themes of Hollywood blockbusters like Black Rain.
Then the collapse happened, and Japanese markets have never looked the same. True, China and Japan have different fundamentals, but it’s worth considering when looking at BABA stock.
Alibaba Stock Isn’t That Impressive
I will further argue that a correlation exists between the Asian gambling culture and Alibaba stock’s technical performance.
Consider the average annual return of BABA. On paper, it’s really not that impressive. Between 2014 (which was not a complete year) and 2016, the average is a mere 1.2%. People love BABA stock for its surges in momentum, but that’s about it. As a prime example, shares are up 15.5% YTD, but only after dropping 12% between Nov. 8 and the end of December.
Click to Enlarge
In China and other Asian markets, they live for this kind of volatility. In America and the West? Not so much.
And if we’re in the business of comparing Chinese stocks to American stocks, consider Amazon’s performance relative to where BABA is now. On its 605th day of trading, AMZN was up almost 4,400% since its first closing price. Of course, that was smack dab in the middle of the tech bubble. But even during the immediate aftermath of Sept. 11, 2001, AMZN was up more than 216% from its opening drive.
Know the Risks Before Buying BABA
This leads me to ask an unavoidable question. If Chinese consumers are truly ringing up the cash registers for discretionary items, why isn’t BABA doing better? They’ve already beaten their regional rivals like JD.Com Inc(ADR) (NASDAQ:JD). Plus, everybody has presented otherwise excellent arguments for its imminent rise higher.
If you were to hold BABA stock long-term, it really didn’t do you any good. If you traded it, and traded it well, however, it’s a different story.
This brings me to a sensitive conclusion. When you talk about Alibaba stock, you have to look at it from all angles, especially the cultural one. BABA can work for you, but boy, you have to know what you’re getting yourself into.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
