Alibaba (NYSE:BABA) stock continues to diverge from the direction of Alibaba Group. Although the company continues on a path of massive growth, traders have seemed unwilling to buy Alibaba stock.
Investors may have good reasons for concerns about Chinese equities. Still, with the profit growth not reflected in the price of BABA stock, investors may have excellent reasons to buy despite potential worries.
Internals Versus Externals
The “China discount” means that Chinese stocks will trade at a lower price due to their ADR status and the political concerns related to China. I do not see this as much of a worry internally. For now, Alibaba stock has begun to write its history without founder Jack Ma.
As I mentioned in a previous article, Daniel Zhang has taken full control of Alibaba now that Ma has stepped down as chairman. This seems to have caused few issues for investors. Jack Ma telegraphed his intention to step away and did so slowly. Amid the transition, Alibaba continues to produce stellar numbers.
Despite internal stability, the China discount has affected Alibaba. BABA stopped moving higher soon after the beginning of the trade war. As a result, it trades at a price it first reached over two years ago.
Concerns and Benefits
To be sure, traders have plenty of reasons to factor in a China discount. Investors have seen the extent of the turmoil within Hong Kong. As many may recall, Alibaba canceled plans for a Hong Kong IPO following the protests.
However, other factors predate the Hong Kong demonstrations. The fact that U.S. investors cannot buy Chinese stocks directly has likely hampered the growth of these equities. Alibaba stock, or rather the equity of the Cayman Islands-based holding company which represents Alibaba, has traded on the New York Stock Exchange for more than five years. Yet, it has never seen the valuations of its nearest U.S. equivalent, Amazon (NASDAQ:AMZN).
Today, it trades at a forward price-to-earnings (PE) ratio of around 20. This falls short not only of AMZN, but also the S&P 500 average, which now stands at about 22.2.
Moreover, doing business in China has brought with it image-related concerns. A recent episode of South Park parodied the extent to which many U.S. businesses will go to appease China. Looking beyond the comedy, it brings to mind questions about the costs of dealing with China.
Are people going to sell Alibaba or a company like Disney (NYSE:DIS) due to China connections? Or will they sell these stocks if they do not do enough to placate Chinese authorities? Investors should worry, as China responded by banning South Park in the People’s Republic. Now, businesses such as the NBA are working to avoid a similar fate.
On the other hand, investors have to wonder whether Alibaba already prices in these concerns. Net income grew by 46.5% in fiscal 2018 and 36.9% in the 2019 fiscal year. During the last quarter, the company reported a 42% increase in revenue from the year-ago quarter.
It also beat earnings estimates by 34 cents. If that is the performance when “impacted” by the trade war, it leads some to wonder how it would perform in a world without tariff fears.
The Bottom Line on Alibaba Stock
The current price of Alibaba stock more than factors in the political concerns related to China. The holding company status of BABA stock, as well as trade tensions, give U.S. investors plenty of reasons to factor in a China discount.
However, Alibaba may have become too cheap to pass up. Despite revenue and profit growth rates exceeding 30%, BABA trades below S&P 500 averages. Concerns about China may call for a smaller position. Still, with the massive growth of past quarters likely to continue, U.S. investors should at least keep BABA on their watch lists.
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.
