Alibaba Group Holding Ltd Earnings Beat Can’t Hide Warts

Absolutely no questions exist — Alibaba Group Holding Ltd (NYSE:BABA) has been a monster investment. Year-to-date, the BABA stock price at just under $185 gained over 110%. In market capitalization terms, Alibaba added roughly a quarter-trillion dollars. All signs are a go in its quest to dethrone,Inc. (NASDAQ:AMZN). But should late-to-the-game investors buy into this rally or simply let it go?

A review of Alibaba’s second-quarter performance gives you great reads.

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Against a consensus earnings-per-share forecast of $6.85, BABA stock came in at $8.57, or a 25.2% positive surprise. More impressively, Alibaba’s year-ago Q2 EPS was $5.26, resulting in a 63% jump. Furthermore, when Alibaba beats, it beats big. Since Q1 of 2015, BABA’s average positive surprise is 15.4%. Additionally, the margins are improving significantly in recent quarters.

On the revenue front, BABA is a steamroller. According to Bloomberg, the e-commerce giant reported its “fastest pace of sales” since its 2014 initial public offering. CEO Jack Ma’s plan is to reinvigorate China’s 4 trillion-yuan retail market, currently mired in antiquated ways. The company is enlisting “half a million mom-and-pop shops as part of a drive to woo customers both online and in-store as it opens its wallet to boost services to merchants on its platform.”

Additionally, momentum is surging into Alibaba’s cloud-computing business. In Q2, cloud sales doubled, putting pressure on Amazon, and regional rival Tencent Holdings Ltd (OTCMKTS:TCEHY). In theory, all of these developments are strong positives for the BABA stock price.

However, theory and actuality clashed in the markets. After jumping to an early lead, BABA stock closed out the November 2 session down nearly 0.7% against the prior.

Is this a mere blip — or an early-warning signal?

Fundamental Questions Dog BABA Stock

Internet forums are rife with positive comments about BABA stock, as they should be. The e-retailer was a massively profitable pick, particularly if you had gotten in at the bottom of 2016. Again, no one’s disputing the success; rather, the debate centers on whether or not any juice remains.

So far, investors have ignored the company’s warts as the BABA stock price soared to record highs. But if you look close enough, they exist. One of Alibaba’s ongoing credibility concerns is fake products. Like our own fake news scandals, Alibaba has consistently fought allegations that it turns a blind eye to counterfeiting.

But taking a page out of the fake news playbook, many of the accusations carry nuggets of truth. For one thing, the consistency of the accusations alone raises eyebrows. More critically, China runs a counterfeit economy that totals $400 billion. From shoes to electronics to even medication, Chinese copycats mimic anything and everything. Needless to say, they cost American companies billions of dollars.

It’s not just black market goods that potential buyers of BABA stock should worry about. Take a look at Jianghuai Auto Corporation’s 4R3 and tell me that’s not a cheapo imitation of Ford Motor Company‘s (NYSE:F) F-150 truck.

The other ongoing stigma for Alibaba is that its financials may not be on the up-and-up. What a surprise. Legendary hedge-fund manager Jim Chanos blasted the company’s accounting practices last year. The Securities and Exchange Commission has also had “inquiries” about the fundamentals that drive the BABA stock price.

A decisive, smoking gun has yet to materialize, but who are they kidding? Alibaba has absorbed serious accusations of fake products and fake financials, in a country that profits from producing fakes. If it quacks like a duck, it’s probably a duck.

BABA Stock Not a Good Buy at Today’s Price

Of course, most people are gung-ho about BABA stock because of its technical momentum. However, they should consider longer-term implications of eastern and western business practices. For example, Chinese culture places personal reputation at a premium. Conflict is eschewed over harmony. Controversially, this means that lying is justified if a higher goal is achieved.

What it all boils down to is that if you smell smoke in a Chinese company, it’s a raging inferno.

Naturally, my assessment isn’t a popular one. But bear in mind that I’m not retroactively criticizing BABA stock. If you made insane profits, go out and celebrate. My concerns address whether or not investors should buy in right now. In that context, I’m going to have to pass.


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

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