The ever-popular Chinese internet and e-commerce firm Alibaba (NYSE:BABA) is making headlines, but this time it’s for negative reasons. After a blistering year in 2017, Alibaba stock rose even higher this year before its shares collapsed. But with the shares returning to where they were last summer, is now the time to buy BABA stock?
Let’s look at the technical situation. On a year-to-date basis, Alibaba stock has dropped 7.5%. But that only tells half of the story. At one point near mid-June, the shares were up almost 20% for the year. But since that time, the market capitalization of the Chinese internet giant has tumbled nearly 23%.
And this is where the contrarians come into play. As previously mentioned, BABA stock enjoyed a banner year in 2017, almost doubling in price. It also put doubters like me to shame. Bulls’ thesis, which predicted that Alibaba would leverage its enormous consumer base, played out perfectly.
We should recognize that Alibaba’s e-commerce platform transacts $550 billion of gross merchandise value annually. No one else, including Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT), comes close to that figure.
But while many investors have profited handsomely from Alibaba stock, the investment isn’t without its weaknesses. If you’re already up substantially on BABA stock, you may want to take some money off the table, considering that BABA doesn’t currently offer passive income. If you’re looking to buy Alibaba stock, I would advise you to wait before doing so.
Here are three reasons why I’m not yet convinced about the merits of BABA stock:
Alibaba Stock Faces Demographic Risks
Over the past year or so, I’ve noticed a common theme among bullish arguments on Alibaba stock. Specifically, bulls like to point out that the e-commerce heavyweight benefits from its home country having the largest population in the world. China has more than four times as many people as the U.S.
Logically, the implication is that as the world’s second-largest economy grows even more powerful and wealthier, its citizens will clamor for modernity’s luxuries. One of those luxuries, of course, is e-commerce and the digitalization of everything.
Along those lines, BABA bulls will often cite China’s internet penetration rate. Recently, the country eclipsed the 800 million internet user benchmark, which represents nearly 58% of the country’s total population. By way of comparison, in 2015 the U.S. internet penetration rate was 74.6%.
Such stats provide Alibaba bulls with plenty of confidence. But here’s the thing: don’t expect China’s internet penetration rate to rise much more from here on out, since China’s GDP per capita is incredibly low.
And even if China’s internet adoption rate does rise, not every one of its internet users will be able to engage in e-commerce.
Alibaba Stock Has a Transparency Problem
Two years ago, one of the biggest concerns about Alibaba stock was the company’s financial transparency. In fact, noted short-seller Jim Chanos stated that “the accounting at Alibaba is among the most questionable” of all of the major companies that he had analyzed.
The ugly reality is that BABA’s accounting is still questionable. To be fair, that problem is not limited to Alibaba. Rather, it’s a risk shared by many Chinese stocks. Accounting standards are not the same there as they are here. We must remind ourselves that China is a one-party, Communist nation.
So it’s no surprise that several analysts still consider BABA stock to be dicey. Behind the company’s glitz and glamor lie practices that would shock Western business professionals. Experts know that Alibaba is a safe-haven for counterfeiters. Because of thst ongoing problem, Forbes contributor John Doggett warned that “American companies should not trust Alibaba to guide them into the Chinese market.”
I’m with him on that. I’ll also add that the fruit doesn’t fall far from the tree. If the company facilitates counterfeiting, then it would not be surprising if its accounting is not entirely proper. My best advice to owners of BABA stock is: Buyer beware!
Who Knows How Long the Trade War Will Last?
Let’s not beat around the bush: the ongoing trade war between the U.S. and China has hurt Chinese stocks. You only need to look at the iShares China Large-Cap ETF (NYSEARCA:FXI) chart to obtain confirmation of that statement.
Cheerleaders for Alibaba stock believe that the trade war will boil over. Not to sound flippant, but how do they know that? President Trump has many descriptors, but predictable isn’t one of them. If he wants to go gangbusters on China despite the obvious pain that doing so will cause the U.S., he’ll do exactly that.
Plus, we have no evidence that the trade war will cease anytime soon. A few days ago, the Trump administration imposed sanctions on China’s government for buying Russian weapons. To me, it appears that Trump is killing two birds with one stone, i.e. squeezing China and Russia simultaneously.
That move bolsters Trump’s support among his conservative base. His xenophobic supporters who feel threatened by Asia’s rise to power will be especially supportive of the decision. The move could also placate some liberals who have fiercely criticized Trump’s apparent affinity for Russia and its president, Vladimir Putin.
So why then would Trump go soft on China now that he’s “winning?” If anything, he’s probably going to double down on the trade war with China to prove that he’s not a coward. And that, my friends, would be, as the president would say, a “yuge” negative for BABA stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.