3 Pros, 3 Cons on Buying Alibaba Group Holding Ltd Stock

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BABA stock - 3 Pros, 3 Cons on Buying Alibaba Group Holding Ltd Stock

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Like most tech stocks, Alibaba Group Holding Ltd. (NYSE:BABA) had a bit of a rough February. After topping the $200 mark to start the year, BABA stock fell sharply after a soft earnings report and general market jitters.

The stock has regained about half its losses since the peak now. And with good reason, the earnings report wasn’t really that bad, and the general stock market is recovering. However, in the broader picture, Alibaba’s fundamental questions remain. The accounting is opaque, and rising competition within China also puts some pressure on the long-term story.

BABA Stock Cons

Continuing Accounting Concerns: In a recent article, I highlighted the accounting concerns that bears are bringing against Alibaba. Since then, the skeptics haven’t let up. The blogger that started it all added to things with another lengthy post following Alibaba’s most recent earnings report.

In that post, the blogger highlights eight additional concerns. These include, among others, increasing intangible assets, overstated revenues, exploding share-based compensation, and the discovery of potentially wide swaths of fake branded merchandise on the site’s shops.

It’s worth noting that, this quarter, Alibaba did take a multi-billion write-down on Alibaba Health and Alibaba Pictures. The blogger had previously pointed out both subsidiaries as being wildly overvalued on Alibaba’s balance sheet, and it appears his posting forced management to admit the loss.

More generally, Alibaba could clear up a lot of these questions with more transparency in their earnings reports. So far, they haven’t elected to go in this direction though.

Confusing Ant Financial Transaction: Earlier this month, Alibaba announced a transaction to purchase 33% of Ant Financial in a non-cash transaction. The full details are available in this virtually incomprehensible 86-page SEC filing.

It appears that Alibaba will be giving up the right to 37.5% of Ant Financial’s profits (which amounted to around $300 million last year) in return for acquiring a third of the equity in Ant Financial.

In theory, this move sets the stage for Ant Financial to go public. However, this may just raise more bad press for Alibaba. Back in 2011, the company controversially restructured Alipay, giving substantial control to Jack Ma privately, and supposedly stripping value from minority shareholders.

Investors in Yahoo!, then a major Alibaba owner, sued Alibaba for “severely impair[ing]” the value of their investment. Given that history, Alibaba’s latest head-scratching deal is unlikely to sit well with skeptics.

Strong Competition: For years, there was the perception that Alibaba was the only long-term player in Chinese e-commerce. Other companies would get hot for a year or two, see their shares explode higher, but eventually lose momentum and fizzle.

However, JD.com (NASDAQ:JD) has broken that moat. Unlike other Alibaba rivals, JD continues to grow at a dizzying pace of close to 50% year-over-year for years on end. Like Alibaba, JD is going international, focusing on SE Asia, but eventually moving to the U.S. and Europe as well.

And JD is backed by powerful partners/investors including Tencent and Walmart Inc. (NYSE:WMT). Alibaba continues to expand into dozens of other businesses and geographies, but if they aren’t careful, JD could outpace them in their home market.

BABA Stock Pros

Earnings Were Good: BABA stock sold off a few percent earlier this month following earnings. It then proceeded to drop a lot more in the ensuing days, but that was more the fault of the market.

While the earnings report certainly wasn’t a blowout quarter, it was good enough to keep the growth story on track. Sure, EPS came up slightly light, but revenues beat.

More important, Alibaba raised guidance going forward. Don’t fret the earnings report. The recent BABA stock weakness was market-related, and peers such as JD also dropped sharply in February before bouncing.

Ant Financial Spin-off: Put aside the questions of whether the recent Ant Financial transaction was problematic from a corporate governance standpoint for a second. From a business perspective, Alibaba appears to be making an ideal move at just the right time.

Payment stocks are on fire right now. Just look at Square Inc (NYSE:SQ) and PayPal Holdings Inc (NASDAQ:PYPL) lately. Assuming the Ant Financial IPO could launch soon, they’re bringing a hot product to market at an auspicious moment.

On top of that, Chinese stocks have been all the rage over the past year. This will be a sizzling IPO launch. Given the questions dogging the quality of Alibaba’s balance sheet and the lack of cash as compared to intangible assets, scoring a big IPO would help validate Alibaba’s valuation.

Grocery Store Roll-out: As the saying goes, “imitation is the sincerest form of flattery.” Going by that, Alibaba must respect Amazon.com, Inc. (NASDAQ:AMZN), as they keep copying from Bezo’s playbook.

The latest venture is Alibaba’s grocery store chain, following in the footsteps of Amazon’s play for Whole FoodsAlibaba’s Hema supermarkets, according to Ad Age, aim to shake-up China’s primitive grocery store scene. Hema aims to blend online and offline grocery shopping.

Online shoppers get impressive 30 minute home delivery, while in-store shoppers get restaurants, advanced barcode scanning, and the ability to pay with Antpay, among other features.

BABA Stock Verdict

BABA stock is not for me. Sure, the company appears to be doing amazing things. But the lack of transparency in their accounting is a real turn-off, particularly given the issues other U.S. listed Chinese companies have run into.

And even discounting the confusing accounting matters and potentially self-serving deals, BABA stock simply isn’t that cheap. I see no explanation for Alibaba being worth $500 billion when JD.com is still worth just $65 billion and continues to become an increasing threat to Alibaba in its core home market.

All else equal, I’d prefer JD’s valuation to Alibaba here, and when you consider JD’s CEO Richard Liu versus the smooth talking Jack Ma, I’ll take team JD any day.

At the time of this writing, the author owned JD stock and had no position in BABA stock. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/baba-stock-buying-pros/.

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