Beware! Competition Is Coming for Alibaba Group Holding Ltd Stock

Advertisement

BABA - Beware! Competition Is Coming for Alibaba Group Holding Ltd Stock

Source: Shutterstock

I’ve become increasingly cautious about Alibaba Group Holding Ltd (NYSE:BABA) stock over the past few months. BABA stock gained 81% in 2017, adding over $200 billion in market value. But resistance has held at $190 going back to early November, with Alibaba stock once again trying to challenge those levels as I write this.

There are a number of risks here, as I detailed earlier this month. But a risk worth focusing on, particularly in the context of recent events, is competition.

The bull case for BABA is based in part on the attractiveness on the Chinese market overall and e-commerce in particular. With nearly 1.4 billion customers, many of whom are moving into the middle class or beyond, the Chinese market indeed is tempting.

Of course, businesses worldwide are targeting the market. And while Alibaba has an early lead, competition is intensifying — and rivals may even be closing the gap. So far, BABA is showing enough strength to keep the stock in its current range. But the biggest potential downside to Alibaba stock will come if its dominance no longer looks as assured as it does at the moment.

The company’s peers are doing their best to make that happen.

Enter Tencent

Just this week, Tencent Holdings Ltd (OTCMKTS:TCEHY) announced it would take a stake in the Chinese business of French retailer Carrefour SA (OTCMKTS:CRRFY). With local operator Yonghui Superstores Co. also involved, the move will combine Tencent’s payment business with grocery and retail outlets in the country.

The move is almost a carbon copy of Alibaba’s strategy. In November, the company took a 36% stake in grocery store operator Sun Art Retail Group. In both cases, the aim is clear: extend online dominance to the off-line world. Both Alibaba and Tencent can profit in their payment businesses, collect data and use storefronts to deliver goods purchased digitally.

So, in many ways, Alibaba’s future success will be tied to its ability to win offline as well as online. And competition will be fierce. Wal-Mart Stores Inc (NYSE:WMT) has a solid presence in the country and a partnership with Alibaba’s online rival, JD.com Inc(ADR) (NASDAQ:JD). Tencent is entering the fray, and existing physical retailers in China will have their own say.

Alibaba can win here, to be sure — but the space is moving fast. Multiple Chinese companies, including both Alibaba and Tencent, already have rolled out concepts similar to the Amazon Go recently launched by Amazon.com, Inc. (NASDAQ:AMZN) in the U.S. Off-line, Alibaba won’t have much room for error.

Is JD.Com Gaining Ground?

Tencent will be a fierce rival for Alibaba. But JD.com looks like the biggest threat. I continue to believe JD stock is a better buy than BABA stock, as I argued earlier this month. JD’s valuation is much lower and, as Luce Emerson detailed last year, JD already is taking market share.

JD’s potential competitive advantage is its logistics operation. As Dana Blankenhorn — a BABA bull — pointed out on this site in November, Alibaba consists of computer infrastructure, not physical infrastructure. It’s JD.com whose model is much closer to that of Amazon.

There are pluses and minuses to both models. Alibaba can drive better profit margins without the need to maintain (and build) all that infrastructure. JD.com, on the other hand, has much better inventory control and can avoid the counterfeiting problem that continues to dog Alibaba. And JD is growing that logistics business, reportedly raising $2 billion this month in an effort to support expansion both in-country and globally.

If off-line shopping is the next frontier for the online giants, Alibaba’s lighter model is going to have to outperform JD’s centrally run operations, given the valuation gap between the two stocks. With BABA stock valued at more than seven times that of JD, anything less than a knockout win for Alibaba means JD stock is probably the better play. That could be a lot to ask, particularly with Walmart backing JD.

BABA Stock Can Win — And It Has To

Obviously, Alibaba is not going to be wiped out by competition. But what concerns me after 2017’s gains is that the valuation suggests outright dominance. On an earnings basis, Alibaba stock doesn’t look particularly expensive, at 27 times forward earnings per share (EPS). But given the risks to the Chinese economy (whose data no one trusts), potential accounting problems, and the VIE structure, some discount should be applied to the multiple here.

More broadly, there simply seems to be better stocks out there. I’d much rather own JD. US-facing e-commerce plays like AMZN and Overstock.com Inc (NASDAQ:OSTK) have their own valuation concerns, admittedly, but they also possess more stable structures and, in Amazon’s case, unquestioned dominance.

That’s just not the true of Alibaba. And if its dominance erodes at all, it could be very troublesome for BABA stock.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/competition-coming-alibaba-baba-stock/.

©2024 InvestorPlace Media, LLC