The commentary on Alibaba (NYSE:BABA) has been mixed, especially with the trade war continuing to wreak havoc on the market. Although Alibaba stock has been in the news a lot lately, the overall investment story hasn’t changed much. The same growth story is still driving the bull case and the same risks are still supporting the bears.
Here’s a look at both sides of the coin for BABA stock.
Pro: Strong Growth Story for Alibaba Stock
A big reason that BABA stock is on anyone’s radar is the fact that several observers consider it the Chinese Amazon (NASDAQ:AMZN). That’s because Alibaba has become the go-to marketplace for nearly half of the Chinese population. Similarly, Amazon has become the first port of call for most Americans.
Put Amazon and China together in one sentence, and you have every investor’s dream: a fast-growing company with a hold on a massive population whose buying power is also on the rise.
Although Alibaba began with e-commerce, the company has since morphed into a data-driven conglomerate offering a wide range of services. Now it’s China’s largest e-commerce platform and the nation’s largest cloud business.
Alibaba has used the past few years of impressive revenue growth to invest in the firm’s future. Outside of its cloud segment, BABA has also built out a food-delivery platform as well as a digital-entertainment arm. On top of that the firm bought out a 33% stake in Ant Financial. Ant and Tencent (OTCMKTS:TCEHY) controls about 90% of China’s payments market.
Pro: China’s Digital Landscape
Another reason Alibaba stock should be on your radar is that China’s digital economy is only in the nascent stages. Experts forecast e-commerce sales in China to increase 15% or more annually over the next few years. And right now, Alibaba controls more than half of China’s e-commerce market through Taobao, Tmall and Alibaba.com.
That hold on China’s online shoppers is crucial because it means that as e-commerce expands, so will Alibaba. Much like Americans trust Amazon, Chinese consumers likewise trust Alibaba. As more people switch to shopping online, BABA will be the first place they look.
They’ve heard the name and they know to trust it. This sentiment also implies substantial positives for the BABA stock price.
Pro: BABA Stock Is on Sale
Whether or not a stock is cheap is all in the eye of the beholder. But there’s no denying that at the current rate, Alibaba stock is cheap compared to a year ago.
InvestorPlace’s Luke Lango sees the BABA stock price making its way back to $200 per share in 2020. He’s not alone either.
According to The Wall Street Journal, every one of the 50 analysts covering Alibaba stock was bullish. The average price target came in at $219.38. Moreover, the lowest target price was $193.60, which represents a 13% upside from where shares trade today.
Con: Slowing Economic Growth
Perhaps the biggest worry on traders’ minds when it comes to Alibaba stock is the U.S.-China trade war. With an already slowing Chinese economy, economic tensions will worsen this situation. Beijing reported that its economy grew at its slowest pace in 28 years in 2018. Understandably, that has raised alarm among investors of Chinese stocks.
Much of BABA’s growth story is dependent on China’s growing middle class and the fact that the nation’s consumers have more purchasing power. However, not only is the Chinese economy showing signs of weakness, but retail sales also slowed. Worryingly, this suggest that consumers aren’t as willing or able to spend as analysts previously believed.
Con: Chinese Ties
The fact that Alibaba is a Chinese firm is both a rose and a thorn. On one hand, the fast growth in China is a huge factor in BABA’s success. However, being tied to China also adds a layer of risk for investors. Not only have analysts raised concerns about the validity of Chinese economic data, the ongoing trade war with the U.S. has forced BABA to pledge its allegiance to its home country.
Many have speculated that Alibaba’s decision to list on the Hong Kong exchange has political motivations. The move has been dubbed a “homecoming.” Although the capital raised will certainly be useful, it’s a statement that reinforces BABA’s ties to Beijing. Plus, it acts as an insurance policy for Alibaba if Trump decides to restrict China’s access to Wall Street.
Con: Competition
While Alibaba is controlling the majority of China’s e-commerce market, many are still concerned about competitors like JD.com (NYSE:JD) that threaten to slow BABA’s growth in some categories. Specifically, JD has made strides toward gaining consumer trust and expanding its offerings by partnering with Tencent and Walmart (NYSE:WMT).
Plus, BABA has to compete with strong international players like Amazon if it wants to grow outside of China. Many are worried that Alibaba’s rapidly growing portfolio of businesses is diverting management’s attention from its most important core business. Such a diversion could hurt the firm’s competitive edge against rivals.
The Bottom Line
Things look bumpy for Alibaba stock over the next few months as long as the trade war continues. However, a resolution to the tension between Washington and Beijing could send shares of BABA soaring. The pros outweigh the cons here, making Alibaba a good choice for investors willing to ride out some uncertainty.
As of this writing Laura Hoy was long AMZN.
