3 Pros, 3 Cons for Buying Alibaba Stock

Alibaba (NYSE:BABA), the so-called Amazon.com (NASDAQ:AMZN) of China, always generates investor scrutiny. That’s especially true at this juncture. After a meteoric rise in 2017 when Alibaba stock finally justified its premium, we’re now at an impasse.

Alibaba BABA
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On one hand, the BABA stock price at nearly $169 represents a 23% swing from the beginning of this year. This is an impressive tally, considering that the 380-stock exchange-traded fund iShares MSCI China ETF (NYSEARCA:MCHI) is up less than 12% during the same period. Also, the SPDR S&P 500 ETF (NYSEARCA:SPY) has gained almost 19% in 2019.

But on the other hand, Alibaba stock is almost dead-even with 2018’s opening price. In other words, shares of the Chinese e-commerce giant haven’t moved for over a year-and-a-half. Obviously, that’s not the type of performance you want to see if you’re a China bull.

For comparison sake, Amazon shares are up almost 27% YTD. Extended that period to the January 2018 opener and AMZN shows a 59% increase.

Will BABA stock match or even exceed this track record? Or will stakeholders regret holding on too tightly? Here are three pros and three cons to consider:

Pro: Trade War Truce Potentially Benefits Alibaba Stock

Unless you’ve been living under a rock, you know that the U.S.-China trade war has weighed heavily on global markets. What appeared as a rapprochement between the top-two economies of the world last year deteriorated into a war of words.

However, the recent G20 summit in Japan provided an opportunity for both sides to lay the groundwork for a deal. It was a highly anticipated and tense moment for President Donald Trump and his counterpart President Xi Jinping. Though the two administrations didn’t disclose many substantive details, we at least have one critical agreement: both nations will delay escalating tariffs.

Unsurprisingly, the BABA stock price responded positively to the developments. Since the beginning of June, shares gained more than 16%. This contrasts sharply with the month of May, when tensions flared and Alibaba shares hemorrhaged 21%.

The implication is clear: strong U.S.-China relations equal a healthy Alibaba stock.

Pro: Regulations? What Regulations?

Invariably, whenever a discussion about Chinese stocks stirs, you’ll eventually come across their government’s notorious control mechanisms. Let’s face it: China has an infamous record for censorship and for cracking down on elements their administration finds disagreeable. Under that environment, you might worry about the longer-term trajectory of the BABA stock price.

However, for Alibaba and other Chinese consumer-tech firms, like JD.com (NASDAQ:JD), China offers a more agreeable marketplace. That’s because so far, neither the Chinese government nor the general public have shown qualms about their push for products and services featuring artificial intelligence. For instance, facial recognition programs raise concerns about online privacy.

These issues stymie American tech giants like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB). In comparison, Chinese companies have free reign to explore their innovations. Logically, this dynamic has favorable implications for Alibaba stock.

Pro: BABA Stock Receives Flagship Support

One of the things you should understand about Chinese stocks is that this segment is very political. Whereas American companies are largely driven by the profit motive, Chinese blue chips represent both profiteering and patriotism.

What do I mean by this? China has very ambitious goals, such as their “Made in China 2025” initiative. If you keep up on geopolitical news, you’ll realize that they’re not satisfied with merely being big. They want to be the biggest and the baddest, essentially replacing the U.S. from its tech leadership role.

This is the reason why the trade war is so heated. We’re not just fighting for the here and now. Instead, we’re looking decades down the road. As such, you can expect BABA stock to receive maximum support from the Chinese government.

Con: Truce Is a “Show Me” Narrative

Alibaba stock may have popped following the G20 summit. Since then, however, shares have not impressed, moving sideways as if seeking more substantive news. I’m not surprised one bit.

Quickly, the much-covered trade war truce transitioned into a “show me” narrative, and I can’t blame the markets for it. Too many times, we’ve seen head-fakes in this arena. Late-last year, the global investment community anticipated an eventual trade deal. Instead, we got fiery social media posts from the executive office.

Therefore, absent an actual deal, a cloud will hang over the BABA stock price. Because at any point, this unsteady relationship could rapidly soar. And if it does, we’ve already witnessed how much things can deteriorate.

Con: U.S. Has a Credibility Crisis

Understandably, many equity bulls have held out hope that the U.S. will eventually sign a lasting trade deal with China. Because we live in a globalized economy, we can’t afford to think, let alone operate in isolation. And despite rhetoric to the contrary, the uncomfortable truth is that the U.S. and China need each other for growth.

That said, the bear case against a trade deal is also very strong. The biggest problem affecting investments like Alibaba stock is that the U.S. has a credibility crisis. Currently, we have a worsening relationship with an increasingly belligerent Russia. We have potential flash-points in North Korea and Iran, despite the Trump administration exercising diplomatic caution. On top of that, our allies generally regard us as unstable.

Under that context, President Trump can’t afford to show weakness with China. Moreover, the U.S. must keep the Chinese government accountable for their unethical business practices and intellectual property theft. Otherwise, it signals to everyone else that it’s open season on the U.S.

But obviously, don’t expect China to play nice on this issue.

Con: Chinese Consumer Market Probably Worse Than You Think

One of the biggest headwinds facing Chinese stocks is that you don’t really know what you’re getting. China has always played fast and loose with their economic figures. Subsequently, more than a few analysts have raised questions about Alibaba’s accounting practices.

Even BABA stock isn’t what you think it is. As InvestorPlace contributor Will Healy and many others have brought up, BABA is actually a share in a Cayman Islands-based holding company. Generally speaking, though, stakeholders have ignored these warning signs because the China narrative is so remarkable.

That could change in the coming years, and maybe a lot sooner than some experts anticipate. Early this year, The New York Times reported that Chinese consumer sentiment slipped noticeably. I really doubt that things changed in half a year: due to China owning the more dependent economy, this prolonged trade war hurts them more than it hurts us.

Bottom Line on BABA Stock

I can appreciate why so many bulls love BABA stock. Essentially, China owns the world’s largest market for anything of importance. To win in business means you must win in China. Naturally, Alibaba benefits from home-field advantage.

However, the trade war represents a paradigm shift in how the U.S. and others approach this Asian juggernaut. In many ways, President Trump exposed the dirty underpinnings of Alibaba stock. And that’s why I think investors should cool off on shares until at least the geopolitical headwind is gone.

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

Article printed from InvestorPlace Media, https://investorplace.com/2019/07/3-pros-3-cons-for-buying-alibaba-stock-xlimg/.

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