Investing in Alibaba Group Holding Ltd (BABA) Stock Is Still a BIG No

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BABA stock - Investing in Alibaba Group Holding Ltd (BABA) Stock Is Still a BIG No

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I get it. There are plenty of investors who think that Alibaba Group Holding Ltd (NASDAQ:BABA) is the Chinese Amazon.com, Inc. (NASDAQ:AMZN). I’m sure there are many investors who got in early and have enjoyed big profits, paper or realized.

BABA Stock: Alibaba Group Holding Ltd (BABA) Stock Is Still a BIG No

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My goal when researching companies is not to find momentum trades, but to find long-term investable companies that I think will outperform the broad market over time.

BABA stock just has way too many risks, and I don’t like some of the side games that Jack Ma is playing. In this case, I’m talking about Alibaba’s move into e-commerce in India. I’m sure that India has a massive consumer base and there is potentially money to be made there, but so far, the data isn’t encouraging and I don’t like that BABA has led a $200 million round of investment in a startup called Paytm E-commerce Pvt.

BABA Stock and the India Market

Yes, there is money to be made in India, as I mentioned. Even Amazon is pushing to invest $5 billion in India, according to Bloomberg. Yet BABA stock is taking a risk not only an established retailer but on a startup.

Also, a deeper dive into India shows that there may not be as much profit there as one may think.

An interesting article in The Economic Times points out that the “combined losses of ecommerce majors Amazon, Flipkart, and Snapdeal are twice the annual budget of the Indian Space Research Organisation,” and “more than doubled in FY 2015-16.”

One source reports that Amazon lost about $535 million in the fiscal year, Snapdeal lost $443 million and Flipkart ditched $782 million.

Amazon has the upper hand because it can afford to out-discount everyone else with its deep pockets. In any race to the bottom, the behemoth will always win because it’s a war of attrition and they have more ammunition with which to exhaust the enemy.

In addition, the article points out that once retailers move beyond the first 30 million families in India, the next 30 million families do not have anywhere near the same income. Thus, unit economics will be terrible for everyone, making customer acquisition all the more critical.

Once again, Amazon has the upper hand even as each retailer’s marketing budgets have exploded.

This is the fray that BABA wants to enter? No, thank you. If you take a gander at this one fellow’s extensive blog post, you’ll see that BABA has been acquiring just about anything it can get its hands on and many of these assets are of questionable value. If this $200 million investment is any indication, I can see why.

I’ve also learned a few other things about Alibaba stock that turn me off. One of the great things about eBay Inc (NASDAQ:EBAY) was its prescient purchase of PayPal Holdings Inc (NASDAQ:PYPL). Alibaba stock comes with Alipay, right?

Nope. It turns out that Jack Ma owns the darn thing, and Alibaba has the right to participate in a third of the shares of any IPO. That, by the way, is the simple explanation. The other problem I have with BABA stock is that the ownership structure is insanely complex.

Look at this chart and try not to puke.

Finally, as I’ve written before, there is just too much risk investing in China. Government bureaucrats run the country, and they are only concerned with protecting their jobs. For reasons one might never know — not even Jack Ma — China might suddenly prohibit Alibaba from selling anything until some obscure task is achieved. We’d never know why or how. Or a million other things could happen.

Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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