Why the Trade War Truce Could Signal a Top for BABA Stock

Easing trade tensions seem like good news for BABA stock but other risks remain

By Vince Martin, InvestorPlace Contributor

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The narrative from bulls surrounding Alibaba (NYSE:BABA) has been pretty simple. Concerns around the U.S.-China trade war have led to an unjustified sell-off in Alibaba stock. And with BABA stock trading at 24x forward earnings, that sell-off has created an enormous buying opportunity.

It took some time, but investors of late have come around to that thesis. BABA has bounced about 25% after hitting a 52-week low in late October. But Alibaba stock still sits 22% below June highs leaving more potential upside if sentiment strengthens.

On Monday, U.S. and Chinese stocks rallied on news that the trade war had been paused. BABA stock itself gained about 1.8%. But in the context of the seeming good news on the trade front, that modest rise might be bad news for Alibaba stock. Shouldn’t the potential removal of the biggest negative facing BABA drive bigger gains?

BABA Stock Rises, but…

Alibaba stock gained 1.79% on Monday which seems positive. Certainly, shareholders aren’t complaining.

At the same time, however, it’s not that big a move given the good news coming from the G20 summit. Rival JD.com (NASDAQ:JD) – whose shares admittedly have fallen further than those of Alibaba – gained 3.67%. Weibo (NASDAQ:WB) rose 4.76%.

In a sense, investors ‘sold the news’ when it came to trade talks. BABA actually opened at the highs, up nearly 5%. It closed at the lows. And if trade war concerns were the real driver behind the 22% pullback in Alibaba stock, that reaction doesn’t make a lot of sense. Rather, it suggests that there are other factors at play here.

What’s Pushing Alibaba Stock Down?

In fact, there are. The Chinese yuan has weakened by about 10% against the U.S. dollar in roughly a year – which should lower the value of Alibaba profits to U.S. investors. Chinese macro worries are a big factor as well. U.S.-based casino companies that serve the Macau market have struggled this year. Las Vegas Sands (NYSE:LVS) is off 16%, and Wynn Resorts (NASDAQ:WYNN) 28%. China-facing subsidiaries Sands China (OTCMKTS:SCHYY) and Wynn Macau (OTCMKTS:WYNMY) are down 7% and 21%, respectively.

But those stocks, too, saw big gains on Monday. LVS jumped 6%; WYNN 9.5%. In Hong Kong trading, the Macau-facing subsidiaries did even better, with each rising more than 11%.

Most stocks with China exposure jumped on Monday. Alibaba stock rose too, but by little more than the S&P 500 (which gained more than 1%). That’s evidence that investors don’t see the weakness in BABA stock as driven solely by the trade war. It may be yuan devaluation. It may be worries about the opaque corporate structure and associated accounting concerns.

If the trade war were the only factor in the long pullback in BABA, Monday’s news would seem to set up a huge rebound. But in fact, Alibaba stock is lagging its fellow Chinese plays, and even a peer like JD. That strongly suggests other factors have led to the decline and in turn suggests a key problem for BABA stock in the near term.

What’s Left for BABA?

With Monday’s news, the obvious concerns is what catalysts are left to keep the rally in BABA going. Q2 earnings, despite a revenue miss, helped drive a reversal off the bottom. But with the stock 25% higher, the fiscal Q3 report will have to be stronger, and Alibaba doesn’t report again until mid-January.

The accounting issues aren’t going anywhere. The long-running concerns about the health of the Chinese economy go well beyond near-term trade dynamics. Even large-cap U.S. peers that might serve as benchmarks for Alibaba stock have pulled back.

Sure, BABA stock looks cheap at 24x forward earnings. But Alphabet (NASDAQ:GOOGL,GOOG) is cheaper. So are Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL).

The long-term case for Alibaba stock might still hold. It is the e-commerce leader in a country of 1.3 billion people with decades of potential growth ahead. But even after the rebound, investors aren’t buying that case in the way that fundamentals might suggest.

The sell-off in BABA over the past few months wasn’t driven just by U.S. actions or else BABA stock would have rallied much more strongly when the U.S. pulled back, even if only temporarily.

That in turn suggests at best some choppy trading ahead and potentially a top for BABA. The stock already pulled back 3% intraday on Monday on the back of good news. What happens on the days when there’s no good news?

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/truce-signal-top-baba-stock/.

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