There is a difference between someone calling “bubble” and the bubble popping. During the dot-com boom of the 1990s, I started calling values bubblicious in early 1997, but the party didn’t end until 2000. If you got out when I called for it, you missed nearly all the fun. So, to say that Alibaba Group Holding Ltd (NYSE:BABA) specifically — or Chinese internet stocks generally — are trading at bubble valuations is no proof I have a pin in my back pocket.
The whole of BABA stock is presently worth $386 billion, and shares themselves trade at nearly 60 times earnings. Its 2016 revenue, in U.S. dollars, came to about $22.5 billion — those numbers you see at most finance sites are in Chinese yuan, which trade at a little short of 7 to the dollar. Thus, Alibaba is trading at 17 times revenue.
That’s bubbly in anyone’s book.
While traders may enjoy getting in Alibaba stock and riding the wave, the question for me is when should I get out?
We’re Still In
In full disclosure, I bought BABA stock in November, then bought some more in March. On average, shares cost me $101, and they opened for trade July 13 at $149.
Most InvestorPlace writers still call this a screaming buy. Tyler Craig says big profits await and has suggested a bullish options trade called a “fence.” Joseph Hargett says Alibaba’s Genie — a competitor to Amazon.com, Inc.’s (NASDAQ:AMZN) Alexa — could dominate it. Richard Saintvilus sees $160 in the stock’s future.
This opinion is not unanimous. Nicholas Chahine has a bearish options strategy to consider, for instance. But it’s also short-term; Chahine thinks Alibaba is just rising too fast for comfort.
It was the sudden rise of 20% after bullish calls by management in June — which occurred the same day I was last writing about it — that set chins wagging and got Nicholas fretting. Such a jump, with no real news, is almost unheard of.
Sure enough, the stock did fall over the succeeding week, from $142 per share to $134 per share, but it is now off to the races again.
When Do We Get Out of BABA Stock?
I got into Alibaba because I saw it providing stability against the rise of Amazon. So far in 2016, its gains have doubled the pace of Amazon’s.
In fact, BABA’s value is growing faster than any FANG — that’s Facebook Inc (NASDAQ:FB), Amazon, Netflix, Inc. (NASDAQ:NFLX) and Google parent Alphabet Inc (NASDAQ:GOOGL) — and is matched only by other Chinese high-flyers like Weibo Corp. (ADR) (NASDAQ:WB), up 78%.
Bubbles in companies that are fundamentally sound occur because nothing else seems to be working, while capital is flowing in.
Since the start of the year, the Dow Jones Industrial Average is up less than 10%, and the Nasdaq Composite has gained 16%. Most of the market’s gains are concentrated in a few big tech issues. With interest rates remaining low, asset prices keep rising. Success begets success.
What pops these bubbles is the appearance of a sound alternative, or a pre-recession event that causes people to batten down the hatches. Rising interest rates should provide the alternative, stupid Washington policies could easily be the precipitating event.
I have predicted that we should expect the bubble to pop this fall, but I’ve been wrong before. I tend to be early. Right now, I’m heavily weighted toward cash and international stocks like Alibaba.
I’m going to continue leaning in that direction and be prepared to lose some of my remaining gains when I do abandon ship.
For the summer, I’m inclined to let BABA stock ride. But keep an eye on it. As Ronald Reagan said in a different context, trust Alibaba, but verify that all remains clear. Because it won’t always be.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long BABA and AMZN.
