The Settled Lawsuit Is Just Noise for Alibaba Stock

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Although Alibaba (NYSE:BABA) has proven to be one of the top names in the market, it can’t escape controversy. For stakeholders in BABA stock, the Chinese e-commerce giant disclosed a doozy: management basically admitted that their platform is a safe-haven for counterfeit products.

BABA Stock: The Settled Lawsuit Is Just Noise for Alibaba Stock

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Recently, Reuters reported that the company will pay $250 million to settle a U.S. lawsuit. The issue? BABA concealed a warning to the investing public concerning its capacity to prevent fraudulent commerce practices.

Specifically, Alibaba’s management team met with China’s State Administration for Industry and Commerce but failed to disclose this meeting.

In early 2015, roughly four months after the e-commerce firm’s initial public offering, the SAIC revealed its concerns about BABA stock. The regulatory body’s white paper claimed that the company’s websites facilitated fake products or those with infringed trademarks. As a direct result of this exposé, Alibaba stock crumbled.

Naturally, several shareholders were none too happy about the later-withdrawn white paper. To compensate for the losses in BABA stock, injured parties submitted multiple class-action lawsuits which were eventually consolidated.

Officially, Alibaba admitted no wrongdoing in settling the case. More importantly, the markets believe them. Although Alibaba stock incurred some red ink, the overall damage is minimal. Still, it’s worth considering the longer-term risks.

BABA Stock Emblematic of Chinese Business Practices

I can’t say that I’m the least bit surprised that this issue came to the forefront. China has a long, storied history of infringement. Although it sounds terrible to say that bluntly in this politically correct environment, it’s just the truth. Investing in BABA stock or any other publicly traded Chinese company carries a risk of fraud.

Immediacy bias makes us believe that U.S.-China relations worsened under President Donald Trump. The truth is, though, they’ve always been pretty bad. For instance, Secretary of Commerce Penny Pritzker, under the Obama administration, apparently told Chinese President Xi Jinping, “you can’t keep stealing things.” That doesn’t sound like a warm friendship.

What it sounds like is people acknowledging the plain, ugly truth: China is an expert at counterfeiting brand-name products. They’re also great at bootlegging, plagiarism, intellectual-property theft and other terrible practices. As further proof, academic fraud in Chinese universities has reached epidemic proportions.

Therefore, the fruit doesn’t fall far from the tree. Alibaba stock is China’s flagship. Should we be surprised that the company allows such behaviors and practices?

And let’s not forget that this isn’t the first time BABA stock has raised eyebrows. More than one analyst has accused the company of playing loose with the books. Now, I’m not saying that Alibaba is outright cooking them. But it’s interesting to note that a pattern is emerging.

Counterfeiting Isn’t Just a Chinese Problem

I’m going to be blunt about another point. In the past, internet trolls have brought up my Japanese heritage as a factor in my criticism of Chinese companies. I don’t need to respond to such ad hominem because it’s simply not true.

But to further illustrate my objectivity, I will gladly admit that counterfeiting is not an exclusively Chinese domain. In fact, it’s a major problem with the very American company Amazon (NASDAQ:AMZN). I would know because I was a victim of such counterfeiting.

During last year’s World Cup, I was looking for soccer-related T-shirts. In this department specifically, I concede my Japanese bias. I found some killer T-shirts from an Amazon merchant and purchased them right away.

After opening the much-anticipated package, though, I was dismayed: the shirts were clearly poor quality. Moreover, the insignia on the shirts appeared like they were stuck on at home with an iron.

Of course, I immediately called Amazon, and they took care of the problem. They refunded me my money. The bootlegger had his account removed. But a few days later, the huckster was back at it again, selling the same junk products.

So no, this isn’t just a problem impacting BABA stock. Far from it.

Alibaba Stock Remains Unchanged

The logical question, then, is how should investors approach BABA stock moving forward? I think the markets have already answered that: Wall Street cares, but not all that much.

That said, this latest news item is equally bullish and bearish. If you’re long Alibaba stock, you’re not too focused on the counterfeit issue. As I mentioned above, counterfeiting is not just an Alibaba or China problem. In this digital environment, it’s startlingly easy to defraud consumers of any nationality. Instead, your focus is on the company’s technological innovations, of which it has plenty.

But if you’re bearish on BABA, you just received more confirmation for your argument. Plus, if you didn’t like Alibaba, you probably avoided Chinese companies in general due to the country’s prevalent fraud culture. As such, the lawsuit settlement didn’t change anything on a net basis.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/settled-lawsuit-just-noise-for-baba-stock-alibaba-stock/.

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