3 Good Reasons to Be Cautious About BABA Stock

Alibaba Holdings Inc. (NYSE:BABA) has delivered triple digit gains to shareholders so far this year, making it one of the hottest stocks of 2017. The Chinese e-commerce firm is seen continuing its rally through the end of the year, with some analysts claiming that the firm is on its way to dethroning tech darling Amazon.com Inc (NASDAQ:AMZN).

alibaba stock ipo baba stockFrom a rapidly growing cloud computing arm to a bustling social selling platform, I don’t disagree that BABA stock has a lot of upside. However, when any stock climbs so quickly, it’s worth taking a step back and considering the risks. How solid is the BABA rally and can it continue at the same pace? My colleague Richard Saintbilus sees BABA soaring above $200 in the next few months, but there are a few risks involved in that thesis.

Here’s a look at three reasons to keep your wits about you while trading BABA stock.

1. What Goes Up Must Come Down

It is most certainly possible that the more than 100% upside we’ve seen from BABA stock so far this year is the beginning of an even larger upward trend. However, it’s also important to realize that swings of this magnitude don’t often happen in just one direction. Much of the reason for the massive gains centered on the firm’s stellar quarterly reports which have shown Alibaba growing at an impressive rate.

Growth is the main reason that BABA stock is appealing to investors, and so far the firm has delivered plenty of that. Alibaba also has some exciting future projects going on, including international expansion, a payments platform called Alipay and of course, its growing cloud computing business. Alibaba CEO Jack Ma sees the firm’s fiscal 2018 revenue rising by between 45% and 48%, unheard of for a firm with a market cap exceeding $450 billion.

But therein lies the problem. Growth like that is not only tricky to achieve, but it’s unlikely to continue forever. Because BABA’s rally is built on the promise of stellar growth, any revision to these figures, no matter how small, could crush the rally.

2. The China Effect on BABA

While BABA is working on expanding outside of China’s borders, the firm isn’t established elsewhere just yet, meaning that the company is hugely dependent on China’s economy. More specifically, Alibaba is dependent on China’s consumers. While consumer spending in China has been on the rise since the global financial crisis, there’s a good chance we could see macroeconomic events disrupt that momentum in the coming year. Chinese retail sales data from the past year show that consumers can be rather erratic, and with the geopolitical tension happening nearby in North Korea, it would be misguided to ignore the potential for a disruption among Chinese consumer spending.

Then there’s the fact that Beijing doesn’t have a great history of painting an accurate picture of China’s economic health.  In the past, the accuracy of Chinese economic data has been questioned, so there is some room for concern when the success of a company is largely based on economic success in China.

3. Accounting Issues

Speaking of transparency, another factor to consider when buying BABA stock is that the firm is under an ongoing review by the SEC. In May 2016, the SEC began investigating Alibaba’s accounting practices. So far, the investigation appears to be a simple fact-finding exercise in which the Securities and Exchange Commission has been trying to understand the firm’s business model and confirm that it’s stellar revenue growth figures are in fact correct.

While there’s been no concrete evidence of wrongdoing, there’s a chance BABA might have to rework the way it reports some of its sales, meaning the firm would have to revise its reported financials. If that does happen, even if the error was minor, you can expect to see BABA stock come crashing down from current levels.

The Bottom Line

Alibaba is a great retail play. The firm has been delivering impressive growth that is slated to continue. However, after such a steep rise, it’s worth considering the risks before jumping in with both feet. It might be wise to wait for a pullback before taking a position, but if you’re in it for the long run and are willing to ride out some turbulence, you may be able to ride BABA stock even higher.

As of this writing, Laura Hoy was long AMZN.

Article printed from InvestorPlace Media, https://investorplace.com/2017/09/baba-stock-be-cautious/.

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