Why I Haven’t Bought Alibaba Group Holding Ltd (BABA) Stock Yet

Advertisement

Another day, another stock I got wrong … at least so far. I’m not a proponent of Alibaba Group Holding Ltd (NYSE:BABA), and I’m not going to jump on the bandwagon yet. Admittedly, this is a tough road to traverse. As long as the trend holds, BABA stock is looking at a 6%-plus return for March.

Why I Haven't Bought Alibaba Group Holding Ltd (BABA) Stock Yet

Source: Shutterstock

Year-to-date, Alibaba stock looks far more impressive, gaining 25%. By means of comparison, the benchmark for Chinese stocks iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI) is up less than 12%.

Furthermore, BABA has taken advantage of the so-called “Trump rally” while it has faded for others. For example, SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has gained only 5% this year. Beyond the recent technical performance, plenty of positive fundamentals support the bullish argument for BABA stock.

BABA Stock Has Tremendous Potential

Primarily, Alibaba is a direct play on the behemoth that is the Chinese economic dragon. At a population size of nearly 1.4 billion, only India at 1.34 billion is anywhere close. When stacked against other countries, that would mean 18.5% of the planet is Chinese. Several companies dream of getting an 18.5% market share of the U.S. population, which is comparatively small at 326 million. Thus, exposure to Alibaba stock immediately puts you on a higher playing field.

As InvestorPlace contributor Will Ashworth has pointed out, no company dominates the Chinese sector like Alibaba. Last year, Chinese e-commerce sales totaled $900 billion. This represented 18% of all retail sales, whereas in the U.S., online purchases account for only 12% of total retail. And to top it off, BABA has attained “80% market share of Chinese e-commerce.” So the recent rally in BABA stock is well-justified against the fundamentals.

By sheer force of numbers, China has the largest number of internet users at 721.4 million. The comparative statistics aren’t even close. India only has 462 million internet users, or a 36% step-down from China.

Another factor to consider is the internet’s penetration rate against the total population. For example, the U.S. and Japan have a combined average penetration of nearly 90%. On one hand, this indicates that most Americans and Japanese are educated and tech-savvy. On the other hand, their potential is largely tapped out. You’re not going to find too many people from these countries that have never used the internet.

In sharp contrast, China’s internet penetration rate is only slightly more than 52%. For BABA stock, that represents ample growth opportunities. Unfortunately, its American counterpart Amazon.com, Inc. (NASDAQ:AMZN) is stuck in a mature market.

Pouring Cold Water on Alibaba Stock

All of these are wonderful facts, and if they work according to plan, BABA stock investors are in for a real treat. The problem is that few things work out so perfectly. And this is where I give Alibaba stock a cold shower.

Many bullish arguments center on the potential of Jack Ma & Co. and not necessarily the reality. Sure, it’s a great thing that a little more than half the population doesn’t use the internet. That simply represents more markets that BABA can tap into, or does it? While we’re talking about populations, we should mention the fact that the median age in China is 37. This isn’t old by any means, but it’s not young, either. So as the average population ages, you’d figure that their prime spending habits are likewise fading away.

In addition, we should note that China’s urban population is just under 58%. That’s definitely not a good stat if you’re focused on becoming a technological standard-bearer. The urban population in the U.S. is 82%, while Japan stands at more than 94%.

Unless China has some plan on increasing the urban population, and thereby introducing more people to today’s technology, I’m not sure how BABA stock would benefit. E-commerce potential is only useful if internet access is practically available. Otherwise, it’s just numbers without context.

For those that have done well with Alibaba stock, my hats off to them. At the same time, you have to wonder what’s taking so long. BABA stock is up around 58% from its initial public offering.

That’s awfully pedestrian for the “Chinese Amazon,” and it gives me pause.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/why-i-havent-bought-alibaba-group-holding-ltd-baba-stock-yet/.

©2024 InvestorPlace Media, LLC