Alibaba Group Holding Ltd Stock Has a Severe China Risk You Can’t Ignore

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BABA - Alibaba Group Holding Ltd Stock Has a Severe China Risk You Can’t Ignore

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Undoubtedly, Alibaba Group Holding Ltd (NYSE:BABA) ranks among the best investments over the trailing two-year period. During this time, Alibaba stock tripled, handsomely rewarding both speculators and early believers. Even now, on a year-to-date basis, BABA stock is up 8%. But I would caution anyone from reading too deeply into this positive result.

Currently, the markets aren’t too happy with the company’s decision in “taking an equity stake in its fintech affiliate Ant Financial, which owns mobile-payments service Alipay.” With fierce competition coming from domestic rival Tencent Holdings Ltd (OTCMKTS:TCEHY), investors want BABA to focus on growth.

Furthermore, while the Chinese tech firm’s latest earnings report for the third quarter of fiscal 2018 was solid, it wasn’t overwhelmingly spectacular. BABA produced a modest earnings per share beat against consensus estimates. This result paled in comparison to big-sized earnings surprises in prior reports.

In response, the markets treated BABA stock poorly. Compounding matters was the fact that Amazon.com, Inc. (NASDAQ:AMZN) produced impressive results in its Q4 earnings report, leading to a much better performance in the markets.

Still, bullish analysts actively encourage investors to look at the bigger picture. The company has made significant technological upgrades, including advanced consumer behavioral analysis programs.

Increasing revenues leads to increasing data, making such analysis applications more valuable to BABA merchants. Indeed, the 39% increase in “customer management revenue” in Q3 buoyed even Alibaba stock contrarians.

Admittedly, the organization’s technological investments demonstrate a strong corporate vision. However, will it be enough for new investors to take a shot on BABA stock in light of other opportunities? I have my doubts, and it has to do with the Chinese consumer.

BABA Stock Tethered Dangerously to Chinese Consumer Data

While I agree with the bulls that making consumer behavioral apps more valuable is a big boost for sales and profitability, you must first have a healthy consumer base. For China, that’s never been a problem. The old logic goes: the more people you have, the more customers you have.

At the same time, no economy, Chinese or otherwise, is immune to corrections. A significant reason why BABA stock has been a top performer is that Chinese consumer confidence soared since April 2016. According to the Organization for Economic Co-operation and Development’s consumer opinion survey, sentiment significantly breached pre-Great Recession levels.

Based on another indicator of China’s consumer confidence, the Asian giant has likely reached all-time highs in optimism. The bulls will state that this is even more reason to jump onboard BABA stock. But for prospective buyers who presently don’t own shares, they could end up holding the bag.

From September 2014 to October 2017, Alibaba stock and the OECD Chinese consumer opinion survey share an 89% correlation. Empirically speaking, wherever the Chinese customer goes, so too goes BABA.

Alibaba stock, Chinese consumer sentiment
Click to Enlarge
Source: Source: JYE Financial, unless otherwise indicated

Even more concerning, the most recent read of the Chinese consumer confidence index demonstrates flatlining since October. Subsequently, Alibaba stock has also been flat during this time frame.

When considering this extremely strong correlation, the company’s investment potential is a double-edged sword. BABA stock is a great play so long as China remains a viable opportunity. But as soon as the China story goes under, so will Alibaba.

To put this into perspective, Amazon stock has a 46% correlation with our consumer sentiment index over the aforementioned timeframe. Since Amazon’s initial public offering, it has virtually no correlation with consumer sentiment. In other words, Amazon will thrive or die largely on its own fundamentals.

AMZN versus consumer sentiment
Click to Enlarge
Source: Source: JYE Financial, unless otherwise indicated

It’s Time to Read Between the Lines!

If you’ve been paying attention to current events, one way or another, we’re likely to have a China problem. Both real news and fake news are in consensus: the best way to avoid armed conflict in North Korea is to economically pressure China.

A great argument exists that such economic pressure has always been the answer. Besides, the world’s second-biggest economy doesn’t always play fair. However, the difference today is that we have a President who is not afraid to call people out directly.

Needless to say, this doesn’t bode well for our relationship with China. We’ll definitely hurt should push come to shove. But China will hurt much, much more than the U.S. And as I have empirically demonstrated, BABA and China’s economy are intertwined. That alone should be cause for serious concern.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/alibaba-stock-has-severe-china-risk-you-cant-ignore/.

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