Alibaba Group (NASDAQ:BABA), the Chinese Cloud Emperor, reports earnings before trading opens Aug. 15, and not much is expected.Revenue of $16.5 billion would be close to what it did in the fourth quarter of last year. Earnings of $1.49-$1.51 per share would be close to what it did in its most recent quarter.
The shares were due to open Aug. 14 below $161 per share, about 5% from where they were a year ago but 19% ahead of where they were at the start of the year.
Analysts love Alibaba stock, with Jefferies recently initiating a “buy” rating with a target of $216 per share. But traders seem to hate it, pointing to its latest downturn, an early August thud that brought it from $178 to $155.
Who’s right and who’s wrong? It depends on your time horizon.
BABA Stock a Short-Term Pain
In the near-term Alibaba faces serious issues.
The trade war and Chinese economy top the list. Shareholders recently approved an 8:1 stock split ahead of a listing in Hong Kong. Alibaba stock is listing there to access Chinese investors because Hong Kong supports dual-class shares. Like many U.S. tech and media companies such as Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Alibaba is structured to give insiders control without ownership.
But if China decides to take the economic hit and end Hong Kong’s special status to put down protests, the market’s special rules may disappear with it. China’s stock exchanges practice corporate democracy – one share, one vote – and Alibaba originally listed in the U.S. to avoid it. A China move on Hong Kong would also hit Alibaba stock, and the Chinese economy, very hard, threatening a recession.
The bigger issue for Alibaba is corruption. Corruption took down the head of its digital media division last December. A government video is publicizing other cases against Alibaba Group and other Chinese tech companies. China has investigated a half-dozen major cases against Alibaba this decade.
Then there is Michael Evans, a Canadian who now serves as Alibaba Group president and joined from Goldman Sachs (NYSE:GS) in 2015. He faces charges over the 1Malaysia Development Berhad scandal, in which $8 billion was misused.
Alibaba Stock a Long-Term Gain
Over the longer-term Alibaba’s future looks so bright you need shades.
As I’ve noted, Alibaba’s cloud is unique in that it’s selling Alibaba financial applications. An example is a new “operating system” for stores the company recently rolled out, making it a “one throat to choke” for retailers’ computer needs.
Applications represent a higher-value use of the cloud than infrastructure, the market dominated by Amazon (NASDAQ:AMZN), or the platform business dominated by Microsoft (NASDAQ:MSFT). Alibaba has almost 20% of the Asia-Pacific cloud market, more than any other company. BABA has services throughout Southeast Asia, which is booming as western companies move supply chains out of China.
Then there’s the Alipay payments platform. It’s well ahead of rivals like Visa (NYSE:V) in fintech, backed by a $150 billion money market fund. Our Wayne Duggan calls Alipay the company’s secret weapon. I agree.
The Bottom Line on BABA Stock
It’s going to be a bumpy ride.
China’s decision to let the Yuan float means Alibaba stock’s Chinese results must be downgraded. The threat of a recession on the mainland is real and Alibaba will suffer for it.
This means you could see Alibaba stock trade below the $130 level it was at in the beginning of the year. Local investors may not pick up the slack as U.S. bears attack the stock.
But over the longer run, five to 10 years out, Alibaba should be a core holding for any investor. Watch the tape, accept the risk, and grab a bargain.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, MSFT and BABA.