It has been a year of vicissitudes for Alibaba Group Holding Ltd (NYSE:BABA) stock. The market welcomed BABA stock into 2016 with a hammer. The Alibaba stock price plummeted roughly 25% between the beginning of the year and Feb. 11. That’s the lowest dip in 2016 so far.
But BABA stock quickly recovered to post a 3.05% gain for the first quarter. It gained only 0.63% in the second quarter. The third quarter was a hit for Alibaba stock, with the price increasing roughly 33%.
The most obvious catalyst was its outstanding second-quarter earnings report, in which it crushed analysts’ expectations. However, BABA stock has lost roughly 12% in the fourth quarter, with a couple of weeks still to go. But year-to-date, Alibaba stock is still up by over 13%.
With all of that in mind, what the heck is going on with BABA stock?
BABA Stock and the Trump Problem
Donald Trump’s recent presidential election victory has contributed to Alibaba’s ongoing fourth-quarter loss. During his campaign, U.S. president-elect Trump said he would overturn global trade. Bloomberg quoted him as saying China is “killing us.” This has created the sentiment that a Trump administration threatens BABA’s U.S. expansion plans.
For instance, the demand for goods through Alibaba’s AliExpress to the U.S. will drop significantly if Trump’s administration places higher tariffs on Chinese goods. In addition, a trade disruption could make it less appealing to U.S. brands to take to BABA’s business-to-consumer platform, Tmall, to sell to Chinese consumers.
But a Trump administration can’t be as bad for Alibaba stock as it’s being made out. Analysts are finally seeing this, with a number of them recommending BABA stock recently. Analysts at Morgan Stanley recently said Alibaba stock is worth $130 a share. Just before that, SunTrust analyst Bob Peck said that BABA stock is worth $125.
Instead of worrying about the incoming U.S. administration, investors should focus on the real strengths of Alibaba stock, some of which could make BABA have a stellar year in 2017.
BABA Is a Financial Services Company Too
Followers of Alibaba probably know it founded Alipay, a payment platform, in 2004. Credit Suisse said that Alipay controlled “just under half” of China’s online payment market. As of 2012, online transactions in China were worth $660 billion. That’s a lot of money going through Alipay.
BABA stock has advanced beyond payment services, which are already huge as seen here, and it also offers financing, wealth management, credit rating, homeowner loans and insurance. It operates its financial services business under the Ant Financial Services business, which was split from Alibaba Group prior to BABA’s IPO in 2014. This affiliate of Alibaba stock was valued at around $60 billion, following the $4.5 billion financing round in May this year.
This is a big deal for BABA stock because the company is entitled to 37.5% of Ant’s pretax profits annually, until it acts on its right to buy up to a one-third stake in the financial services company. Ant Financial is reported to be planning an IPO sometime in 2017. If Alibaba buys at its IPO, the BABA stock price is likely to benefit because it will increase its valuation.
Alibaba Stock: Focus on International Markets
Alibaba execs have said that its short-term focus isn’t on U.S. consumers. Instead, BABA is focused on penetrating emerging markets. This should be appreciated because Alibaba reflects most things about emerging markets.
Most of the goods sold through Alibaba’s e-commerce platforms originate from China and they’re inexpensive relative to what other developed economies produce. The point of intersection is that many people in emerging markets cannot afford expensive goods.
Therefore, with its focus on emerging markets, BABA stock is poised for an era of growth. Its focus on emerging markets will help it expand e-commerce globally. As part of its emerging market initiative, Alibaba recently signed a letter of intent with Thailand to help build the country’s digital economy.
Investors should look out for moves under this theme in 2017.
Long story short, investors should look beyond the Trump trouble and appreciate the growth potential in BABA stock. I believe Alibaba stock is a buy for any investor who can stomach the volatility of the Chinese economy.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
