Alibaba (NYSE:BABA) looks absurdly cheap at the moment. Alibaba grew revenue 58% year over year in fiscal 2018 (ending March), and non-GAAP earnings per share surged by 40%. Margins were pressured in the first quarter, admittedly. But the top line still rose 61%. Yet BABA stock now trades at just 21 times forward EPS — and BABA stock has fallen 22% from its 52-week high.
Obviously, there are external factors. Chinese stocks are in a bear market. Trade war fears continue to accelerate. By the standards of China’s tech leaders, Alibaba stock actually hasn’t had a bad year. BABA stock may be down 22%, but rival JD.com (NASDAQ:JD) has fallen 48%. NetEase (NASDAQ:NTES) and Weibo Corp (NASDAQ:WB) both are down 40%+.
But there are concerns surrounding Alibaba stock itself. As I wrote last month, BABA stock simply isn’t as cheap as it looks. That’s true even after another 10% decline.
And, in the near-term, Alibaba stock could face more pressure. External concerns aren’t abating — and, for several reasons, BABA stock could face an outsized impact. Long-term, the recent weakness could just be a blip in the road. But, right now, I’m not quite ready to go flying into BABA stock just yet.
The Uncertainty Problem for Alibaba Stock
Nervous investors generally run from uncertain stocks. And, as impressive as the Alibaba story is, there’s still quite a bit of uncertainty here.
Many investors remain skeptical about the company’s accounting. The same is true for the country as a whole. Alibaba continues to execute complex joint venture transactions that raise eyebrows. As MarketWatch pointed out, a recent reorganization of its money-losing Koubei JV allowed the company to book a gain. Alibaba gave up control of a partnership in Russia and has taken in quite a bit of cash in similar deals over the years despite the fact that internal cash flow should, in theory, fund many of those investments.
Alibaba quite clearly is not a fraud, but there are issues of trust surrounding its numbers (including the impact of “brushing” on its GMV, or gross merchandise volume, figure). Add to that the VIE structure (BABA shareholders don’t actually own shares of Alibaba) and there are reasons for caution here — at least.
Fundamental concerns aside, there’s also a notable change in the business. Founder and chairman Jack Ma is leaving the company. Surely, Alibaba will persist — but one can imagine that investors wouldn’t be thrilled if Jeff Bezos left Amazon.com (NASDAQ:AMZN) or Mark Zuckerberg left Facebook (NASDAQ:FB). (The latter example may not hold at the moment, admittedly.) Ma’s departure is just one more reason why cautious investors may desire a cheaper price before buying the dip in BABA stock.
Are There Better China Plays Than BABA Stock?
Even if Alibaba stock is near a bottom, the next question is whether BABA is the best play on the thesis that Chinese stocks, on the whole, have fallen too far. For these reasons, and others, I’m not sure it is.
I look foolish for my continued recommendation of JD, for instance, but I still think that stock has real potential in the long run. NTES also looks intriguing here. iQiyi (NASDAQ:IQ), the so-called Netflix (NASDAQ:NFLX) of China, offers high reward with its high risk.
BABA admittedly is cheaper than those smaller China plays. And investors looking to buy the dip in China may prefer to do so via the largest players — either Alibaba stock or that of Tencent (OTCMKTS:TCEHY). Certainly, BABA at $165 is intriguing — and there are many worse plays in what looks like an overheated global equity market.
But intriguing isn’t quite compelling — and $165 isn’t necessarily the bottom. With news on the trade war, currency and macro fronts unlikely to reverse any time soon, the uncertainty surrounding Alibaba isn’t coming to an immediate end. And the same may be true for the pressure on Alibaba stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
