The shares of two of China’s most prominent companies — e-commerce giant Alibaba (NYSE:BABA) and social-media company Weibo (NASDAQ:WB) — have been pummeled amid worries about the U.S.-China trade war. Alibaba stock has tumbled 26% in the last 12 months, while Weibo stock has sunk nearly 60% over the same period.
Investors have sold Weibo stock and Alibaba stock because they’re worried the trade war will decimate China’s economy, causing China’s consumers to buy many fewer products. As a result, BABA’s profits would slump, hurting BABA stock. Also consumer products companies will have much less money to buy ads on Weibo, a popular website in China that’s similar to Twitter (NASDAQ:TWTR).
Those would be valid worries, if the trade war does drag on and intensify. But for the last year, I’ve believed that the conflict would be resolved because the leadership of both countries have compelling reasons to bend over backward to reach a deal.
Always known as an egomaniac who’s obsessed with “winning,” President Trump badly wants to be the man who finally got Beijing to treat its trading partners fairly. And following multiple revolutions against Middle Eastern dictators over the past eight years, and the overthrow of many Communist regimes at the end of the Cold War, China’s leaders must be more than a little worried that the collapse of the Chinese economy would lead to their (literal) doom.
But the countries appear to have reached an impasse over the last six weeks. Yet both sides may have their own reasons to make it seem as though the talks have foundered, even though a deal is about to be signed.
Given China’s domination by Western powers in the 19th and early 20th centuries, it’s very important for Beijing to show that it’s not kowtowing to Washington. Meanwhile, President Trump’s ego, and his resulting desire to be seen as the main hero of the story, likely make it imperative that he is closely, personally involved with reaching a deal.
Consequently, I believe there’s a great chance that the sides will reach an agreement, or at least resolve most issues, during the upcoming G20 meeting, which is slated to begin on June 28. President Trump is supposed to meet with his Chinese counterpart, President Xi, during the gathering.
When the two presidents meet, the U.S. can make concessions that will convince the Chinese people that their country hasn’t become a second-rate power that’s subservient to America. And Trump can say that he personally made a “huge” deal.
Why Alibaba Stock and WB Stock?
Alibaba is by far the top e-commerce company in China. Its marketshare is expected to come in at 53% this year, according to research firm eMarketer. The firm expects China’s e-commerce sector to grow 30% in 2019 alone.
In BABA’s fiscal year that ended in March, its revenue jumped 50% and its bottom line surged 30%. Given such strong growth, one would expect that the forward P/E ratio of Alibaba stock would be at least 30 — in-line with the company’s profit growth in fiscal 2019. But the current forward P/E for BABA stock is only 23.6. That makes BABA stock quite attractive at current levels.
Similarly, eMarketer expects Weibo to be used by 30% of China’s population in 2021 — nearly 420 million people. That’s up from 27% this year.
WB’s top line jumped nearly 50% last year, and its net income from continuing operations climbed 63%. Despite that huge growth, the forward P/E ratio of WB stock is a nearly unbelievably tiny 11.7. The market cap of Weibo stock is also ridiculously low, standing at around $10 billion. That’s just over 2% of the market cap for Facebook (NASDAQ:FB).
The Long-Term Outlook of the Trade War
As many others have said, the trade war will definitely not last forever. Either China will make more concessions if Trump is re-elected in order to save its economy, or the new Democratic president will end the conflict. So for long-term investors, buying WB stock and Alibaba stock at these levels definitely makes sense.
But if my theory is correct, WB stock and BABA stock will pop much sooner than that.
As of this writing, the author owns shares of Weibo stock.