BABA Stock: Alibaba Is a Buy Ahead of Earnings

Their economy may falter, but Chinese spending power hasn't wobbled a bit

Many pundits left Chinese e-commerce giant Alibaba (BABA) for dead money in August, warning that the Chinese economic slowdown, along with the company’s second-quarter miss and revenue warning, would keep BABA stock in investors’ doghouses for the foreseeable future.

BABA Stock: Alibaba Is a Buy Ahead of EarningsAnd until the end of last month, the pundits were proven correct, as BABA stock tumbled from $83 on July 24 to $57 on Sept. 28. However, BABA stock has rebounded over the last month, sitting at around $76 as of Monday.

But despite the recovery, BABA is still trading only a little more than 10% above BABA’s $68 IPO price, despite its continued high annual revenue growth.

Signs are mounting that Chinese consumer spending is much more resilient than many had feared, and that Alibaba earnings, due to be reported Tuesday morning, should beat expectations. Given these circumstances, investors could do worse than to buy BABA stock ahead of its results.

The Case for BABA Stock

On Oct. 8, BABA CEO Jack Ma wrote to shareholders that China’s economic slowdown has been greatly exaggerated, and that the Chinese people save for times of crisis and do not cut their consumption. It’s hard to believe that Ma would write such a letter opening himself up to charges of misrepresentation and manipulation if Alibaba’s business wasn’t doing better than the Street believes.

Moreover, Ma’s statement seems to be supported by both macroeconomic data released by China and information reported by several bellwether American companies that do a tremendous amount of business in China. According to Beijing’s official statistics, the country’s retail sales jumped 10.9% year-over-year last month, representing the highest growth since the beginning of 2015, Shanghai Daily reported.

And those who doubt both Ma’s statements and official Chinese data should take a look at what some major American companies are saying about their retail sales in China.

McDonald’s (MCD) same-store sales in China soared a staggering 26.8% last quarter, while GM’s (GM) SUV sales in the Asian country jumped an even more amazing 170% last month vs. the same period a year earlier. Although GM and its joint ventures sold 4% fewer vehicles overall year-over-year, the surge in the automaker’s SUV sales indicates that Chinese consumer spending isn’t decelerating significantly.

During the summer, Starbucks (SBUX)and Apple (AAPL) also reported that demand for their products in China remained strong, while China bears had trumpeted Yum Brands’ (YUM) difficulties in China as evidence that the country’s consumer spending was weakening. But given the information provided by McDonald’s, GM, Starbucks and Apple, it seems probable that Yum’s weak China results were caused by competitive pressures, rather than by macro weakness in China.

Still skeptical? After hosting a conference attended by 25 Chinese Internet and telecom companies, American research firm CLSA wrote that Chinese Internet companies saw little impact from China’s macroeconomic slowdown. An analyst from the firm expressed the same sentiment as Ma, citing a “high savings rate” among the Chinese translating into “consumer spending power.” As a result, Chinese consumer spending doesn’t drop much if the economy decelerates a bit, the firm indicated.

Moreover, Chinese Internet companies are continuing to gain market share from their brick and mortar competitors. The firm identified BABA as one of its top picks in the Chinese Internet sector.

The combination of low expectations for Alibaba earnings, the low BABA stock price and Chinese consumer spending that’s defying the Street’s skepticism make BABA stock attractive ahead of its results.

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

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