I made a big mistake earlier this year. I sold my Alibaba Group Holding (NASDAQ:BABA) stock.
I earned a nice profit at $165 per share on my BABA stock. But the shares are now at $189 and heading higher.
BABA is the best way to play China because it’s financially sound, it trades on the NASDAQ, and it’s becoming the Chinese equivalent of Amazon.com (NASDAQ:AMZN).
As Amazon reduced its inventory risk, with half its online merchandise now owned by third-party sellers, Alibaba has doubled down on its “new retail” strategy, which entails its control of both online and offline channels.
Over the last year, the performance of BABA stock has mirrored that of Facebook (NASDAQ:FB), the smallest of America’s five “Cloud Czars.” The market cap of BABA stock, currently $490 billion, is still short of Facebook’s $506 billion, but if I were to choose one of those two, then I would pick Alibaba stock.
Why I Sold My BABA Stock
But as I noted previously, I sold my Alibaba stock recently.
I did that because, while many American analysts have grown more bullish on China this year as the trade war rhetoric has died down, I see trouble ahead.
China has a residential-real estate bubble, like the one that caused the last U.S. recession. The South China Morning Post, owned by Alibaba, insists “China’s special economic and social model” will keep the bubble from bursting.
That sounds to me like “Chinese exceptionalism,” which can be just as dangerous to a portfolio as the American kind. Chinese builders are sitting on 65 million empty apartments and building more in a country in which 25% of the gross domestic product comes from construction. It is possible that China’s government and business leaders can manage this, but it won’t come without pain, and I’d rather invest after the pain than before it.
Meanwhile, Alibaba stock fell hard last year, from a peak of over $210 per share to a low of $130, as the Administration talked up the trade war and TV analysts dutifully discussed the “threat” of “Red China,” even noting that Alibaba co-founder Jack Ma was (gasp) a member of the Communist Party. (This just in. Many American CEOs are Republicans.)
Ignoring the Noise
The point is that, at Alibaba, it really has been business as usual.
The “new retail” strategy of CEO Daniel Zhang may result in smaller margins, but the company’s top line is still growing fast.
Investors buy BABA stock for its cloud, most of which it uses for its own services, including artificial intelligence applications that can manage whole cities in ways Americans can only dream about.
Alibaba is due to report its quarterly results on May 15. BABA is expected to report 77 cents per share of earnings on $13.45 billion of revenue . For the same quarter last year, its revenue was $9.74 billion. This growth doesn’t come at the sacrifice of profit, either. In 2018, of the company’s $37.76 billion in revenue, $9.65 billion, or 25%, hit the net -income line. With Alibaba stock, investors are getting Amazon-like growth with Apple’s (NASDAQ:AAPL) profitability.
BABA is becoming a global-cloud company, with 19 data centers, including two in the U.S., and an “A100” program aimed at dominating clients’ IT budgets. Alibaba is the only cloud giant outside the U.S. regularly tracked by Synergy Research. According to Synergy, BABA is increasing its global-infrastructure market share.
The Bottom Line on BABA Stock
Alibaba stock tends to rise and fall in the U.S. as a proxy for investors’ attitudes about China. BABA stock shouldn’t follow that pattern.
While a 2008-style crash would cause BABA stock to fall, its long-term prospects are outstanding.Alibaba stock faces none of the regulatory risks of the American Cloud Czars. Additionally, BABA is growing faster than they are, and the economies where it’s dominant will continue to grow.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and AMZN.