With more than four months left in 2018, Alibaba (NYSE:BABA) investors aren’t having much fun with BABA stock, which is up less than 3% year to date through Aug. 9.
By comparison, Amazon (NASDAQ:AMZN) is up 62%, and even South American e-commerce leader Mercadolibre (NASDAQ:MELI) is up 22% through the same period.
What gives?
Isn’t Alibaba the kingpin of Chinese stocks? Isn’t it the leader in Chinese e-commerce? Why are investors avoiding BABA stock like the plague?
Don’t get me wrong: I’ve been pro-Alibaba since April 2017 when I recommended BABA stock should be part of any 10-stock portfolio, in large part because of Jack Ma.
Since then it’s up 65%, but not without significant volatility along the way — it’s been exceptionally volatile in 2018 after almost doubling in price the year before.
Again, What Gives?
Well, the simple answer is that investors have sworn off Chinese stocks until the tariff/trade war with the U.S. comes to some appropriate resolution.
Consider that the iShares MSCI China ETF (NASDAQ:MCHI) is down more than 5% year to date and more than 8% over the last three months — slightly less than Alibaba’s 9.3% retreat over the same period.
Until the Chinese flu is contained, Alibaba investors will have to accept increased volatility from BABA stock. It’s that simple.
That Doesn’t Mean You Shouldn’t Buy
InvestorPlace’s Vince Martin recently laid out the positives of Alibaba’s financial numbers while simultaneously reminding investors about the various risks of owning Chinese stocks in general and Alibaba individually.
“Does exposure to China present an enormous growth opportunity or a massive potential risk? Can the Chinese central government be trusted to at some point open its markets?” Martin wrote Aug. 7. “Is Alibaba at risk of being collateral damage in an escalating trade dispute between the U.S. and China? Are the numbers real?”
Except for the trade war, the risks of investing in Alibaba in August 2018 are the same ones that existed when Alibaba went public in September 2014.
So, in my view, if you believe the numbers are real (and I’ve seen no evidence to date that they’re not), a buy decision rests on the best case-worst case scenario of a U.S.-China trade war.
“[Alibaba is] not only the leader in Chinese e-commerce but is also rapidly expanding into adjacent categories within Chinese internet as well as new international markets,” D.A. Davidson director of research Gil Luria told CNBC recently.
That’s the good news. The bad news is it might not matter.
”If this conflict persists and exports from China to the U.S. diminish, the Chinese economy could slow, dampening consumption and thus putting Alibaba’s core business at risk,” Luria said.
The Bottom Line on BABA Stock
For me, nothing’s changed about Alibaba from a corporate standpoint. What has changed is the playing field on which it competes. That’s evolving on a daily basis as the U.S. and Chinese governments play a giant game of chicken.
As Warren Buffett likes to say, “Be greedy when others are fearful.”
As my colleague said about BABA stock: “It’s ridiculously cheap!”
In 2017, Alibaba stock had one significant correction; in 2018, it’s already had three, with its stock heading above $200 only to retreat into the $170s.
Earlier in 2018, I predicted that Alibaba stock could hit $400 by June 2019. However, at that point, there was no trade war, and the Chinese economy was doing just fine.
So, given the trade war, I’m going to push the arrival date back by a year and say it will hit $400 by June 2020 — but only if the trade war is resolved by the end of 2018.
If not, all bets are off.
That said, BABA’s a buy anywhere in the $170s.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
