How to Deal With BABA Stock in the Wake of the Foxconn Ventures Dump

There aren't many concerns about BABA stock that scream sell

News surfaced Mar. 20 that Foxconn Ventures sold 2.2 million shares of Alibaba (NYSE:BABA) at an average price of $181.10 a share. Is the $400-million sale of BABA stock a sign that now is an excellent time to sell your shares in the Chinese ecommerce company?

Up 33% year to date through Mar. 19, momentum investors will likely ride BABA stock a little longer. More conservative investors will like probably take this as a signal to exit their positions.

Who’s right?

Ride the Wave

When it comes to BABA, I’m generally a fan. In November, I recommended Alibaba along with six other Chinese stocks to buy that were down but not out. It’s up 21% since then, but nowhere near its 52-week high of $211.70, hit last June.   

Although China’s economy was starting to show cracks at the time, I concluded that it was too big a company to continue to trade at such levels. I was right about that.

The question is, why was I right? What’s happened with Alibaba specifically, or China more generally, that’s got investors less concerned about the micro- and macro-economic picture?

On the company front, Alibaba delivered third-quarter earnings at the end of January that were generally very good with adjusted earnings per share of $1.77, ten cents higher than analyst expectations, with year-over-year revenue growth of 41% despite a countrywide slowdown in online sales.

Although the company’s revenue didn’t grow by nearly as much as in the previous two quarters (65% growth in Q2 2019 and 76% growth in Q1 2019) investors have pushed its stock higher recognizing that it’s still the biggest player in Chinese ecommerce.

“We expect continued solid China ecommerce growth with Alibaba as the biggest winner,” Raymond James analyst Aaron Kessler, who has a strong buy on BABA stock, wrote at the time in a note to clients.

Sure, you can nitpick about Alibaba’s third quarter, but from where I sit, the fact that the company generated $13.6 billion in free cash flow in the first nine months of fiscal 2019, a 3% increase over a year earlier, suggests that it’s still mighty profitable despite the slower revenue growth.

Should a trade deal get done between China and the U.S., I could see that growth moving higher for a long time to come.

It’s Time to Take Profits

This is where things get a little dicey. There are two sayings we can look to for advice.

The first is, “Never sneeze at a profit.” The second is “Cut your losses short and let your winners run.”

If you bought in November, I could see you going with the latter. However, if you purchased Alibaba IPO shares in September 2014 at $68, a 166% gain over 54 months (24% annualized) is a very nice return for even the most successful investor.

That’s especially true when you consider the negatives of Alibaba’s business.

One area that investors look to for significant growth is the company’s cloud segment. In early 2018, I suggested that the company’s cloud business was one of three things it needed to focus on for BABA stock to get to $400.  

I still feel this way.

However, as InvestorPlace contributor Rohit Chhatwal recently stated, the Huawei fiasco has all sorts of developed countries questioning the presence of Chinese companies involved with technology that reaches into the security infrastructure.

It’s one thing for an ecommerce company from China soliciting business from American consumers. It’s another thing to be using the cloud to spy on those same consumers.

My colleague is right to question the future robustness of its non-domestic cloud business. Until the entire Huawei situation gets settled, large companies in North America and Europe are not going to entertain Alibaba’s services without some serious discount.

Is it enough to derail Alibaba stock?

We’ll find out soon enough.

What Would I Do?

When making any investment, I always consider the probabilities.

The probability that Alibaba will continue to grow its ecommerce business is reasonable. The likelihood that Alibaba’s cloud business won’t be able to make inroads outside China is low. The probability that Alibaba will face some severe headwinds when it comes to cloud security is high.

Is it enough to keep BABA stock from going any higher than $180?

I don’t think so. But don’t expect a straight shot to $400. There will be lots of ups and downs as it elbows its way into the cloud.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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