Wall Street was shocked when it found out that Alibaba’s (NYSE:BABA) founder and chairman Jack Ma would be stepping away from the company. After all, while founders step down from their companies all the time, Ma’s departure comes at an unusually rocky time for Alibaba and the Chinese economy, which has been plagued by tariffs, trade war rhetoric, slowing economic growth and a strong U.S. dollar.
In response to the news, Alibaba stock traded down more than 2%. The stock is now 25% off its recent highs, and trades its lowest levels in over a year.
In the near-term, Ma’s departure means that you should stay way from Alibaba stock for now. There are a plethora of fundamental headwinds that have been weighing on investor sentiment, and Ma leaving is just another fundamental negative for this stock. Plus, near-term moves are largely determined by technicals, and the chart for Alibaba stock isn’t pretty.
Long-term, Alibaba stock is unequivocally a buy. This is a company that is dominating the booming China commerce industry, as well as dipping its toes into next-gen industries like cloud and AI. Alibaba stock is also trading at just 28X forward earnings for what has been revenue growth consistently north of 60%. In other words, this is a big growth stock trading at a big discount. That is usually a recipe for a long-term winner.
But, the long-term winning won’t start today. Instead, sentiment today surrounding Alibaba stock is dominated by negative headlines and worries over China economic growth. Until those worries ease, Alibaba stock won’t reverse course.
Investment takeaway? Wait and see. Wait for the optics surrounding Alibaba stock to improve. See how the market reacts. Then, buy the reversal because that could be the beginning of a huge rally towards $200 and higher.
Jack Ma Leaving Is a Near-Term Negative
There’s no doubt it. Jack Ma leaving the $400 billion company he founded is peculiar, shocking, and overall a negative for Alibaba stock in the near-term.
Granted, Ma has been talking about stepping down from Alibaba for some time. He wasn’t even the CEO of the company anymore. His official title was just chairman. He has a deep love for education (he used to be a teacher), and wants to get back to his roots and pursue philanthropy in education. Plus, Ma has long talked about being able to retire at an earlier age than Microsoft (NASDAQ:MSFT) founder Bill Gates.
This all makes sense. And in that context, Ma’s departure isn’t all that bad.
But, the departure still does nothing good for the optics surrounding Alibaba stock in the near-term. After all, even in the context of a man returning to his roots and wanting to retire early, founders historically don’t leave their companies at such early ages. They also don’t tend to leave their companies when revenue growth is still in excess of 60% and when the business is presumably still in the early stages of its long-term growth plan.
In grand total, it is an odd move that isn’t exactly a vote of confidence from the company’s most well-known executive. At this time, with trade tensions rising, China economic growth slowing, and the U.S. dollar strengthening, Alibaba stock needs a vote of confidence. The stock didn’t get that vote of confidence, and now, the market is selling it off.
Thus, Jack Ma’s departure is and will remain a near-term negative for Alibaba stock. Until trade-related headwinds ease, sentiment will remain dour. So long as sentiment remains dour, investors will take every bit of news in a negative context. And, so long as that remains true, Alibaba stock will remain depressed.
Alibaba Stock Has Big Upside In the Long-Term
Although the near-term outlook on Alibaba stock is quite dour, the long-term outlook is far more promising.
At its core, Alibaba is a hyper-growth digital commerce business with full exposure to China’s rapidly growing consumer class. As China’s consumer class has quickly grown in size and spending volume, Alibaba’s core digital commerce business has taken off like a rocket ship. Even on a massive base multi-billion dollar revenue base last quarter, revenues still rose over 60%.
This hyper-growth isn’t going anywhere anytime soon.
China’s per capita annual household expenditures stand at about $3,600. In the U.S., that figure stands close to $23,000. Clearly, China’s per capita expenditures still have a ton of room to expand.
Moreover, China’s per capita expenditures grew by over 4% last year, not far off the trailing five-year compounded annual growth rate of 6.5%. So, growth in per capita spending isn’t materially slowing, and that gives credence to the thesis that growth should remain strong into the foreseeable future.
Beyond commerce, Alibaba also runs one of the fastest growing cloud businesses in the world, where 100%-plus growth has become the norm. The company is also a leader in China when it comes to artificial intelligence and self-driving, two markets which are oozing with hyper-growth potential.
Despite all these long-term positives, Alibaba stock trades at just 28X forward earnings. That seems anemic next to 60%-plus revenue growth. Thus, once sentiment reverses, this stock could be due for a huge rally.
Bottom Line on BABA Stock
There really isn’t any need to buy more Alibaba stock right now with sentiment negative and only weakening. But, this is a company with massive long-term growth potential, so once market sentiment normalizes thanks to trade tensions easing, that will spark a reversal in Alibaba stock that you will want to buy.
As of this writing, Luke Lango was long BABA.