China’s e-commerce giant Alibaba Group (NYSE:BABA) is hardly fighting for its survival in the midst of trade war fallout. But, letting go of Alibaba stock and replacing it with something a little more certain wouldn’t be the worst thing in the world to do at this time.
That’s certainly not the party line that China nor Alibaba’s fans and followers are toeing at this time. All is well in eastern Asia, they say. And to a large extent, things have been — and could be — much worse.
It would be naive to believe the country hasn’t been wounded by the impact of the trade war though, which in turn has crimped its burgeoning consumer class. Even if most of the tariff hurdles are removed in time for the planned meeting between President Trump and Xi Jinping in October, the recovery could still take a while, and would still take shape late in the economic growth cycle.
In other words, if you own BABA stock, you should at least be concerned.
Focus on the Here and Now … and the Organic
It certainly looks like business-as-usual to Alibaba stock owners. Last quarter’s top line grew 42% year-over-year, extending a long-standing growth streak that let the company beat its sales as well as earnings estimates.
In the meantime, the company announced its intent to acquire the cross-border e-commerce business called Koala, operated by NetEase (NASDAQ:NTES). The deal will further expand Alibaba’s network connecting merchants with consumers.
The Beijing also continues to assure the world it’s doing just fine, touting a second-quarter economic growth pace of 6.2%. That’s still very near its rate for the past several years. The figure would naturally slow anyway, as the bigger China’s economy gets, the tougher the comparisons become.
It’s not the numbers from earlier this year that are of concern, however. The impact of newly imposed tariffs was never going to establish a clear pivot out of a growth phase and into a contraction. Rather, it was always going to take shape as a gradual transition.
The country may already be on the proverbial back nine of that transition, if the most recent reports are any indication.
A Preponderance of Evidence
If you’re looking for a so-called smoking gun, don’t bother. You won’t find it. The argument against BABA stock takes its shape in the sheer number of ancillary and anecdotal red flags that have begun to wave.
One of the pieces of the puzzle is this year’s slower pace of online retail sales. Through the first half of the calendar year, the country’s online spending “only” improved 17.8%. It’s a big number to be sure … a figure most U.S. retailers wished for here. But, it’s a far cry from the 32.4% growth for the same stretch last year.
China’s government officials put an explanatory spin on it, of course, suggesting it was expected given how unsustainably quick online consumerism had grown in the recent past. The problem is, Alibaba stock has been and largely still is priced as if past growth rates are sustainable into the indefinite future.
And for Alibaba, so far they actually have been. Last quarter’s revenue growth of 42% clearly exceeds the norm.
The divergence between the growth rates will eventually catch up with the e-commerce giant though. Indeed, that catch-up may already be materializing. In the second quarter of this year, ad revenue for Alibaba Group rival JD.Com (NASDAQ:JD), search engine Baidu (NASDAQ:BIDU) and social networking platform Weibo (NASDAQ:WB) collectively fell to a growth rate of only 15%. That’s down from a 27% growth rate seen in the third quarter of last year.
It’s arguably a better measure of just how healthy consumerism is in China, in that it’s a reflection of how well consumers are responding to web ads.
More concrete — and more recent — evidence of a slowing Chinese economy includes industrial production growth of only 4.4% in August, down from 4.8% growth in July, which at the time was the lowest reading in 17 years. The typical response to such developments is layoffs, which dis-empower the working class that’s been fueling Alibaba’s growth. It’s easier and faster to terminate people than rehire them.
And even if things do improve for China’s economic engine, so what? Now more than 10 years old, the global economic recovery is running on fumes, at best.
Looking Ahead for BABA Stock
Don’t misread the message. Alibaba will survive, even without Jack Ma at the helm. Cyclical setbacks are normal, and even politically-prodded impasses aren’t unusual. China will rebound, and Alibaba with it. BABA stock may even continue on with its current recovery effort too, against the odds, fueled by the prospect and then realization of genuinely improved trade relations.
The underpinnings of what made Alibaba great have been dinged, dented and damaged though, and they’ll never be fully restored to their original showroom condition. Most any plausible trade war resolution is likely to include some sort of concession from China, but China’s fragile foundation for its new-found consumer class leaves little room for concessions.
Own Alibaba stock if you want to. Just know that its future isn’t going to be as impressive as its past was. There are better prospects out there.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.