To the vast number of analysts and investors, any success that Alibaba Group Holding Ltd (NYSE:BABA) experiences is well deserved. First, you have the fact that Alibaba is the Asian version of the awesomely incomparable Amazon.com, Inc. (NASDAQ:AMZN). As InvestorPlace contributor Dana Blankenhorn points out, “China is the world’s workshop and Alibaba stock, not Amazon, has the best access to it.” Second, BABA stock is an incredibly diversified investment, with business ventures up the wazoo.
Naturally, the optimism surrounding Alibaba stock has made it one of the best performers of the year so far. Shares are up a whopping 31%, notably beating out Amazon, which is no slouch at 21% year-to-date.
Of the 40 analysts covering BABA stock this month, 17 have a “strong buy” recommendation, while 20 are “garden-variety” buyers. The rest are holding it. None are sellers.
Obviously, that’s an incredibly envious statistic. At the same time, I have to ask — what’s taking the market so long? Sure, as the 31% performance implies, if momentum holds, Alibaba stock could potentially flirt with triple-digit returns by year’s end. But against the closing price of its initial public offering, shares are up a little more than 22%.
That IPO occurred in September 2014. So I must ask — did China suddenly become a thing in 2016? Weren’t the fundamentals of China — namely, a huge population — evident years, even decades, ago? Logically, BABA stock should have taken off to all-time highs well before today.
Not Enough Consumers for BABA Stock
The key lesson that struck me during high school economics class was that there’s a difference between “want” and “demand.” I wanted many things during that time — a hotrod, popularity and a girlfriend. Unfortunately, I was the stereotypical nerdy Asian kid, so my chances were disastrously slim.
Demand, though, was a whole new ballgame. As my teacher put it, it is both the willingness and the ability to acquire a commodity or service. I believe many folks share my high school experience — the willingness is there, but not the ability. And it’s the same theme with Alibaba stock.
I firmly believe that the ultra-bullish argument for BABA overlooks the true demand picture. We can willingly hope that all Chinese consumers are capable of fully and frequently using the services of Alibaba. The reality is far different.
According to Oxford Economics, the number of Chinese households making more than $35,000 per year will jump from the current 40 million to 160 million in 2025. It’s this trend that causes my concern for BABA stock. While seemingly everybody is in love with the China story, 160 million “well off” households is not that impressive. This is a country of nearly 1.4 billion people, four-times the population of the U.S.
On our side of the world, we have more than 115 million households. We, however, make a heck of a lot more money. Since the mid-1980s, the median income has not dropped below $50,000. If you do the quick math, our lack of people is more than compensated by our purchasing power. In other words, even with a 160 million Chinese households making over $35,000, American consumers will still win out. So, why go with Alibaba stock when better options exist now?
Alibaba Stock Faces Considerable Long-Term Pressures
Don’t get me wrong: Alibaba stock is a sexy investment. But as my old teacher might say, the company caters more to “wanters” than “demanders.”
The big myth of China investments is that most Chinese people will rise to prosperity. Please! Arguably, the country has the worst demographic crisis in the world. By the year 2050, China may have more old people (age 65 or older) than we have people. As the years tick by, that’s an unprecedented strain on the nation’s budding middle class.
Ultimately, I think this is the reason why BABA stock only completed half the picture of Facebook Inc (NASDAQ:FB). When the social media network first launched, Wall Street questioned its ability to monetize its business. Subsequently, FB stock was negative in its maiden year. But it quickly proved its doubters wrong, and today, Facebook is one of the preeminent stocks in the markets.
You can’t say the same thing about Alibaba stock. It has done plenty of huffing and puffing, but the net result from start to finish is not yet impressive. Some might say it’s downright disappointing. So I find myself in agreement with InvestorPlace’s Tim Biggam. In a very short summary, BABA stock is overextended.
To prove that assessment wrong, the stock must register an all-time record, and move higher from there. Otherwise, it’s the same old story. An exotic investment garners plenty of attention, but when the novelty wears off, it doesn’t look so enticing.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
