To me, Alibaba Group Holding Ltd (NYSE:BABA) is like the raging climate change debate. Proponents of both sides of the argument are essentially looking at the same data, and yet come to radically different conclusions. While BABA stock on paper has far more believers than not, it’s the forecasting that has me concerned.
On the bull side, analysts are enamored with the company, and putting up ever-higher price targets.
InvestorPlace contributor Richard Saintvilus stated that Wall Street simply doesn’t understand Alibaba stock. Furthermore, it continues to underestimate its true potential.
The bearish crowd is admittedly a small one, if you can even call it that. For instance, none of the covering analysts are outright pessimistic on BABA stock. But do a little digging and you’ll come across some sharply worded arguments. In my last article for Alibaba, I cited InvestorPlace’s Lawrence Meyers, who questioned the company based on shady business practices in its native China.
Alibaba supporters don’t necessarily dismiss the controversies and scandals that have impacted the company. Instead, they largely reason that BABA stock has weathered these storms and has continued to demonstrate resilience. As the old adage goes, don’t fight the tape.
Certainly, technical momentum and perhaps investors’ abilities to plug their noses have created tremendous profitability this year. But will that continue to last? I have my doubts, and here’s why.
What’s the Real Story Driving BABA Stock?
One of the recurring bullish arguments favoring Alibaba is China’s growing middle class. Saintvilus mentioned it. So did InvestorPlace writer Tom Taulli. In fact, both of them referenced the forecast that called for 600 million middle-class workers by the year 2022. Forbes apparently forwarded this forecast.
I have two problems. First, what defines middle class? I’ve looked through the Forbes article as well as other publications, and I have yet to find a clear answer. If you’re basing an investment decision on consumer health, it’s critical to understand the denominator. Unless someone can direct me to some hard data, I’m essentially playing with qualifiers, not quantifiers.
The second problem I have is with the forecast’s validity. The Forbes piece specifies the 600 million expectation, but does not specify how that number was calculated. I don’t need an entire dissertation, but a basic layout of the methodology would be helpful. If BABA is so enthused about the Chinese middle class, surely, strong, supportive data must exist somewhere?
But for all I know, some “economist” could have drawn a line going straight up and called it a day.
While that’s obviously a joke, it may not actually be far from the truth. Again, since Forbes or any other source doesn’t detail their forecasting methodology, the best assumption is that they took past data and extrapolated forward.
This method is useful for inconsequential personal discussions about China. But for people considering investing serious capital into BABA stock, they need much more than extrapolations.
It’s Hard to Trust Alibaba
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The Federal Reserve’s economic database provides the official Chinese GDP figures. I hope that anybody remotely interested in Alibaba would analyze it, and not just rely on others’ interpretations.
If you start from the year 2000, China’s economy looks like it has definitively entered the maturation phase, not growth.
Armed with this information, I have to question both the numerator (the forecasted number of middle-class Chinese) and the denominator (what middle class means). I just don’t see the justification for BABA proponents’ optimism. Yes, China is the biggest retail market today, but the Alibaba premium is based on forward assumptions.
Another big and hardly ever mentioned risk is that the official GDP figures themselves could be bogus. Meyers brought up this uncomfortable and alarming possibility. If so, BABA stock investors could be bullish on BS.
While analysts often compare Alibaba to Amazon.com, Inc. (NASDAQ:AMZN), the connection is spurious. We know what our middle class looks like, and we can make reasonable projections. Our government isn’t perfect, but we at least attempt transparency. And every source imaginable scrutinizes our economic data inside and out.
When it comes to investing in the long haul in BABA stock, you can’t separate Alibaba from China. Only the most naive individual will ignore that BABA is China’s flagship company and the two intertwine politically and economically. While it’s beyond the scope of this article to discuss geopolitics, the economic justification for Alibaba is more exaggerated than people want to admit.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
