Alibaba Group Holding Ltd (NYSE:BABA) stock has paused in recent months. A rise in geopolitical risk and a selloff in tech have lead investors to close positions in Alibaba stock. A low multiple and the company’s high growth could attract many buyers to BABA. However, with the multiple risks BABA stock presents, investors might want to look elsewhere for profits in emerging markets.
In many ways, I want to like Alibaba stock. The company enjoys more than 50% in annual revenue growth and a nearly 60% rate of increase annually in profit levels on average. With a forward price-to-earnings (PE) ratio of about 25, the stock appears cheap for such high growth. American stocks with triple-digit multiples such as Amazon.com, Inc. (NASDAQ:AMZN) or Netflix, Inc. (NASDAQ:NFLX) see much lower growth rates.
However, despite this high growth, BABA has been selling off as of late. Alibaba stock has fallen over 15% from its January highs as threats of a trade war loom over the stock. Moreover, tech stocks have struggled this year. Also, even though BABA has little direct exposure to the U.S., threats of a trade war has weighed on China overall.
Comparing Alibaba Stock
One of the problems with Alibaba stock relates to defining the company. Yes, it has become the world’s largest retailer. However, it engages in many other businesses, such as cloud computing and self-driving cars.
Being a retailer also in these businesses has led to its comparison to Amazon. My colleagues and I have both panned this analogy. Even its core business more closely resembles eBay Inc (NASDAQ:EBAY) since it does not own the goods it sells.
Other detractors have effectively compared the stock to Enron Corporation. Since BABA’s accounting has come under scrutiny, many question the integrity of the company’s revenue and growth figures.
In a previous article, I compared it to General Electric Company (NYSE:GE) due to its conglomerate status. With several unrelated entities residing under one umbrella, one can see why it could be regarded as a mutual fund within one company.
Of course, with GE’s troubles and general decline, one has to wonder whether a company should try to out mutual fund the mutual funds. Such a mix of companies gives investors the risk of an individual stock without the stability a mutual fund can provide.
Alternatives to Alibaba Stock
One way to lessen the risks is to purchase an actual mutual fund. Baron Emerging Markets Fund Retail Shares (MUTF:BEXFX) is a fund that invests in companies such as Alibaba. However, BEXFX currently invests 96.3% of its assets outside of Alibaba stock. Even if BABA sees an Enron-like meltdown, it could easily recover. It also invests 3.86% of its funds in BABA peer Tencent Holding/ADR (OTCMKTS:TCEHY), the fund’s largest holding.
Another strategy involves investing in the true “Amazon of China,” JD.Com Inc(ADR) (NASDAQ:JD). JD owns an Amazon-like logistics infrastructure, and it has placed a good deal of competitive pressure on BABA. Moreover, it also enjoys benefits higher revenue growth than Alibaba stock and a lower PE than Amazon. While JD remains risky compared to BEXFX, its focus, structure, and potential for higher returns could make it a more attractive option.
Final Thoughts on Alibaba Stock
Due to accounting and economic risks, investors should avoid Alibaba stock. Annual revenue growth above 50% and a low forward PE will likely attract many buyers to Alibaba stock. Unfortunately, several credible risk factors make BABA cheap for a reason.
Analysts have compared Alibaba to many companies. No matter which peer it more closely resembles, a looming trade war would likely bring the company down along with other Chinese stocks. In addition to the accounting questions, BABA has also evolved into a company structure of several unrelated entities. Many doubt these entities will be manageable under the same umbrella.
Investors with a high tolerance for risk will likely continue buying Alibaba stock, or maybe JD. However, for investors who want to take fewer chances, an actual mutual fund might prove itself a better choice than a stock that pretends to be one.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
