Alibaba (NYSE:BABA) began a new era this month. Founder Jack Ma stepped down as chairman, a role that now belongs to current CEO Daniel Zhang. Although leadership transitions always bring some degree of uncertainty, it so far does not look like a factor that will hurt Alibaba stock.
However, several external issues have held down BABA stock. Unfortunately for traders, these factors will probably continue to hamper Alibaba Group for the foreseeable future. Still, as long as Mr. Zhang preserves one thing, investors can earn substantial returns in Alibaba stock.
Jack Ma’s Departure Changes Little
Jack Ma’s has taken a gradual approach in stepping away from the company he founded. He vacated the CEO position in 2013 but remained chairman of the board until this month. Mr. Ma will retain a seat on the company’s board. Still, the company now belongs to Daniel Zhang, a man who has held the CEO position since 2015.
Many worry about the change in leadership. However, Alibaba made the transition a years-long process that has involved little in the way of surprise. Thus far, it looks like it will resemble that of Tim Cook taking over at Apple (NASDAQ:AAPL) as opposed to the transition that preceded Jeff Immelt’s disastrous tenure at GE (NYSE:GE). Since Zhang has become a known quantity, I do not see Alibaba making radical changes. Likewise, I do not see any significant revisions in the case for or against Alibaba stock.
To be sure, one thing has remained the same about Alibaba Group regardless of leadership. The best thing about Alibaba stock is its connection to China. Likewise, the worst thing about BABA stock is its connection to China.
Profit Growth Boosts BABA
Like it or hate it, Alibaba stock is a growth machine. Analysts forecast earnings increases of 23.3% this year and 26% the next. They also predict revenue will grow by 31.9% and 29% in the same respective periods.
Management can take much of the credit for these increases. Acquisitions such as the recent purchase of the NetEase (NASDAQ:NTES) e-commerce platform Koala merely enhance these increases long term. Also, with the continuing growth of China’s middle class, BABA stock to maintain or increase its growth. More importantly, these increases come amid the current challenges facing Alibaba. Thus, the stock should deliver significant returns to investors even if external conditions do not improve.
Do Not Expect a High Multiple
However, investors also need to remember that Alibaba stock is a Chinese equity. Hence, it has seen its potential held back from the U.S.-China trade war. It also suffers from more internal political disputes. In all likelihood, the protests in Hong Kong led to Alibaba delaying its listing on the Stock Exchange of Hong Kong. Moreover, the company cannot directly sell stock in Alibaba to Americans. For this reason, BABA stock is an ownership stake in a Cayman Islands-based holding company entitled to the company’s earnings.
Do these factors hold Alibaba Group down? Absolutely. Many traders prefer to minimize politics. Also, while I do not expect Alibaba to renege on agreements that created the holding company supporting BABA stock, one cannot escape the fact that Alibaba stock is not an ownership stake in Alibaba.
Hence, these factors have likely stopped Alibaba stock from achieving the triple-digit price-to-earnings (P/E) ratios seen with other growth tech stocks. Instead, the stock trades at a more modest forward P/E ratio of around 20.8. Given the doubts some investors hold about China, I do not expect this multiple to improve significantly. Fortunately for Alibaba stock bulls, it does not have to get better.
The Bottom Line on Alibaba stock
The negatives will not stop the growth of Alibaba stock. While the trade war and conflict with China make for great headlines, traders have long since priced these doubts into BABA.
Would an end to the trade war help? Since the beginning of the trade dispute hurt Alibaba stock, it stands to reason that BABA may recover some of that lost value. However, the status of Alibaba Group as a Chinese company, as well as the nature of Alibaba stock itself, will probably prevent it from achieving a significantly higher valuation.
Still, none of those issues matter as much as some believe. As long as the company can continue its massive growth, traders can still earn significant returns even if the multiple never expands.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
