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A Trade War Isn’t a Risk for Alibaba Group Holding Ltd Stock, But Concerns Persist

Trade war concerns aren't a big risk to Alibaba stock, but that doesn't make it a safe play

3 Pros, 3 Cons to Consider for Alibaba Stock

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In a market made more nervous by potentially escalating tariffs, Alibaba Group Holding Ltd (NYSE:BABA) might appear a candidate for a selloff. After all, the initial face-off over tariffs will be between the U.S. and China, and as one of most China’s largest companies, Alibaba would appear to be at risk.

Indeed, Alibaba stock has sold off, dropping over 12% in the last few weeks. But that appears likely due to broader market weakness. BABA stock itself seems relatively shielded from any direct pressure from U.S.-imposed tariffs.

Yet I still remain relatively skeptical toward Alibaba stock. Tariffs may not be a risk, but plenty of other concerns surround the company. BABA stock looks cheap relative to its growth but likely for good reason. I can see a case for trading BABA at the moment, as support does seem to be holding in the $165-$170 range. Long-term, however, I’m still not sold.

Could a Trade War Hit BABA?

There is some reason to argue that Alibaba could be a target of U.S. efforts to “level the playing field,” at least in the eyes of President Trump.

The Office of the U.S. Trade Representative called out Alibaba’s Taobao marketplace as a “Notorious Market” back in January. With Trump using Twitter Inc (NYSE:TWTR) to criticize not just trade deficits, but intellectual property theft, one analyst has argued Taobao could be at risk for a large fine.

But the legality of the U.S. actually fining Alibaba remains unclear. So does whether, or why, Alibaba would pay such a levy. International expansion remains a key goal of Alibaba — notably in the West. For now, however, Alibaba has focused its efforts in Southeast Asia. India is the next key market, as Lucas Hahn detailed last month.

At the moment, Alibaba has basically no foreign presence. According to the company’s most recent annual report, “substantially all” of Alibaba’s sales are derived from China. As such, tariffs will have little, if any, direct impact.

It’s conceivable that a trade war could lead to a slowdown in China’s economy overall. That slowdown no doubt would impact Alibaba’s growth — and Alibaba stock.

As a result, Alibaba CEO Jack Ma has publicly advocated for free trade in the past. Still, such an outcome remains a long ways off. And the idea that tariffs will show a material and quick impact on BABA stock seems a bit overwrought.

So Is Alibaba Stock a Buy?

If tariff-related fears are unjustified, there’s then a case for buying BABA on the dip. And indeed, Alibaba stock neared a six-month low just a couple of sessions ago, before rallying amid a stronger broad market.

Should those fears dissipate — whether through a change in market sentiment or an easing of the tensions surrounding trade — BABA stock would seem to have a path back toward all-time highs above $200.

That’s an interesting case from a trading standpoint. But from a long-term standpoint, Alibaba stock has plenty of other risks. Competition is intensifying from JD.Com Inc (ADR) (NASDAQ:JD), Tencent Holdings Ltd (OTCMKTS:TCEHY) and many others.

The questionable VIE structure drives accounting concerns that haven’t gone away. Tariffs or no tariffs, the Chinese economy itself long has been considered a candidate for a downturn at some point, after a basically unprecedented economic expansion.

The oft-made argument that Alibaba is the Amazon.com, Inc. (NASDAQ:AMZN) of China is both erroneous and far too simplistic. Alibaba isn’t Amazon, and China isn’t the U.S. It may be that tariff fears, if not a direct driver of the recent decline, have reminded investors of the fact that China, for all its growth, still is a risky market. And Alibaba is a risky play on that market.

That doesn’t mean Alibaba is a short, though over 15% of its float is sold short. At least some of that short interest is likely hedging long positions in Altaba Inc (NASDAQ:AABA) anyway.

But it does mean that Alibaba stock perhaps deserves its mid-20s forward P/E multiple. And it does suggest that even the dip isn’t necessarily a long-term buying opportunity. Investors right now may be focusing on the wrong risks, but that doesn’t mean there are no risks.

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

Article printed from InvestorPlace Media, https://investorplace.com/2018/04/a-trade-war-isnt-a-risk-for-alibaba-stock-but-concerns-persist/.

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