Alibaba Group Holding Ltd (NASDAQ:BABA) is part of a distinguished group. For investors in foreign stocks, this has been the year of China, and BABA stock is one of the leaders. Year-to-date, 16 Chinese stocks are up 100% or more. Alibaba just hit the list itself. With its recent gains, it’s now up 102% on the year.
Regardless, China is putting up rock star numbers in 2017, Alibaba included. Perhaps most importantly to Jack Ma, BABA stock is outpacing chief rival JD.com Inc(ADR) (NASDAQ:JD), which is up just 55% on the year.
BABA Stock Cons
JD Isn’t Going Anywhere: Many Western investors think of Alibaba as the Amazon.com, Inc. (NASDAQ:AMZN) of China. The analogy works in some ways. For example, both aren’t just retailers, they also have huge cloud businesses and various other disruptive side projects. Alibaba is the leading internet conglomerate in China, just as Amazon is in the United States.
However, within retail, Alibaba is actually closer to eBay Inc (NASDAQ:EBAY) in that it primarily serves as a marketplace for third party vendors. Yes, Alibaba does direct selling as well, but it isn’t their primary business. Alibaba has gotten a bad reputation with some clients due to the prevalence of low-quality and fake merchandise on its site. JD.com, Alibaba’s biggest competitor, is putting up huge growth, 50% year/over/year with its focus on high-quality merchandise and fast cheap shipping.
Logistical Issues: Some folks think Alibaba is a fraud or at minimum is materially misstating its books. See this from Australian fund manager John Hempton, which includes some thought-provoking reasoning along with alarming photos of Alibaba’s less-than-Amazon level warehouses. For what it’s worth, famous short seller Jim Chanos suggested last year that Alibaba’s accounting is as opaque as Enron’s was.
But let’s get back to logistics. Alibaba primarily relies on Chinese delivery firms along the likes of FedEx Corporation (NYSE:FDX) in the US for customer deliveries. This will become increasingly problematic for Alibaba going forward. The quality and reliability of these services varies widely within China. JD, realizing this, built out the country’s leading logistics system to ensure customer satisfaction. JD is now leading the way in Chinese drone delivery of packages. In many ways (including this one), JD looks more like China’s Amazon than Alibaba.
Expensive Stock: Even assuming you fully buy into Alibaba’s accounting including its off-balance sheet vehicles, the stock still looks expensive. The stock trades at 60x this year’s earnings, though a more reasonable 27x next year’s if you buy analysts’ consensus estimate.
Still BABA stock is pricey, trading at a jaw-dropping 17x sales. Even Amazon, which is rarely called a cheap stock, sells at just 3x its sales. Is a dollar of Alibaba revenues worth almost five times as much as a dollar of Amazon’s sales? BABA stock bears would emphatically say that they aren’t.