It would seem like the news has been pretty good of late for Alibaba Group (NYSE:BABA) stock … with one obvious exception. The last two earnings reports have looked impressive. The overhang of a major stockholder is ending. And yet Alibaba stock has stayed stuck, trading sideways since February.
To be sure, the U.S.-China trade war presents an apparent stumbling block in front of BABA stock. But rival JD.com (NASDAQ:JD) has outperformed Alibaba shares of late, while facing the same trade-driven macro headwinds at home.
JD isn’t the only Chinese stock with better returns. Yes, Alibaba Group shares have returned 27% so far this year. That’s better than the 16% average of China’s 21 U.S.-listed large-cap (>$10 billion) stocks. But that return puts BABA stock just seventh in the group, well behind leaders New Oriental Education & Technology Group (NYSE:EDU) and Pinduoduo (NASDAQ:PDD), the latter of which has almost doubled in the last two-plus months.
So, relative underperformance, a cheap valuation, and Alibaba’s market-leading status would seem to clear a path for BABA stock to finally break through $200 and beyond. After all, it’s hard (though not impossible) to see external conditions being much worse, yet Alibaba has grown earnings and Alibaba stock has managed to rise.
That path is open. But the concern has to be that if BABA shares stay stuck, it could signal they’re going to be stuck for a very long time.
What’s Gone Right (and Wrong) for Alibaba Stock
Alibaba Group has had some headwinds in 2019. The trade war has pressured consumer and business confidence in China, as several companies have noted in recent months. Protests in Hong Kong have only added to the geopolitical risk, and likely led to Alibaba’s decision to delay its listing on the Hong Kong exchange.
Major shareholder Altaba (NASDAQ:AABA) is liquidating its Alibaba stock. According to Alibaba’s second quarter release, that company (formerly Yahoo!) sold almost 10% of Alibaba shares outstanding between May 20 and August 9.
There are pressures on the business and pressures on the stock. And yet Alibaba has posted strong back-to-back earnings reports. Revenue increased 51% year-over-year in the fiscal fourth quarter (ending March) and another 42% in Q1. Adjusted EPS handily beat Street estimates in both quarters.
Meanwhile, BABA stock hasn’t exactly soared — but it’s held up. The stock bounced from levels around $150 in late May, amid the Altaba selling, and has neared $180 three times in the past few weeks.
Given those external pressures, the case for BABA stock here is that in a tough environment, investors still were happy to buy and/or own shares. So what happens when that environment gets better? After all, Altaba’s liquidation is likely over at this point. The trade dispute should be resolved at some point, even if that point isn’t necessarily anytime soon. Put another way, it seemingly only can get better for Alibaba Group, and for Alibaba stock, from here.
Long-Running Concerns About BABA Stock
The catch is that for some investors, it’s not going to get better for BABA stock. To bears, Alibaba has significant structural problems. Its VIE structure — shareholders actually own a piece of a variable interest entity in the Cayman Islands, not Alibaba itself — makes BABA a no-go for some investors.
Accounting issues have long dogged the company. They were raised again in the decision to go forward with the Hong Kong listing. As I noted at the time, it was strange for Alibaba to sell stock at seemingly cheap prices to raise capital when it had plenty of cash already. Indeed, the company is paying $2 billion to acquire Kaola from NetEase (NASDAQ:NTES), a deal it is financing from cash on hand.
There have been worries about self-dealing, highlighted by Alibaba’s move of Alipay to former CEO Jack Ma. And many investors ignore Chinese stocks altogether, worried about a “hard landing” or, worse, an implosion of the economy still run by a nominally Communist single party.
Can Alibaba Group Stock Finally Rally?
Those skeptics admittedly could be wrong. “Hard landing” predictions, for instance, have been made for at least this entire decade. The VIE structure could change once Chinese regulations do. And, to at least some extent, a 20x forward P/E multiple incorporates those risks.
But at least for now, those skeptics and that skepticism seem to matter. They’re at least one reason why a proverbial lid has stayed on BABA stock. (Shares at this point haven’t moved for two years now.) They’re why, to some investors, Alibaba stock seems like a generational opportunity: an e-commerce leader in a country with over a billion citizens trading at a discount to many U.S.-based large caps with minimal growth. Other investors simply see the stock as a trap at almost any price.
If the news around Alibaba stock gets better, particularly with the Altaba overhang gone, BABA stock has to rally. Otherwise, BABA starts to look like a stock that looks cheap – and will always look cheap, given the structural risks assigned by the market. As bearish as I’ve been on BABA, I can see that path to $200+. If Alibaba stock doesn’t take that path, however, it might be time to worry.
As of this writing, Vince Martin has no positions in any securities mentioned.