Despite the ongoing U.S.-China trade war, shares of Alibaba (NYSE:BABA) stock are currently up over 25% in 2019. Many of America’s largest tech stocks would love that kind of growth. That doesn’t mean that BABA stock is without its issues. The stock is still trying to claw back to its 52-week high that it achieved in June. The stock has been trading in a fairly well-defined range for the last two years.
Looked at without the overlay of being located in China, Alibaba Group is a company American investors should love. However, the sheer size of the Chinese e-commerce giant and the ongoing trade war add a risk premium to Alibaba stock. And that risk doesn’t look to be easing up anytime soon.
Alibaba is an Economy Unto Itself
It’s often mentioned that Alibaba Group is like Amazon (NASDAQ:AMZN). However, BABA is also part eBay (NASDAQ:EBAY), Google (NASDAQ:GOOGL), and Fed Ex (NYSE:FDX) rolled into one. In fact, CEO Daniel Zhang told investors the best way to understand Alibaba is to think of it as an economy unto itself. That was in 2017.
Today, Alibaba has a market capitalization of almost $430 billion. By 2037, the company has plans to create 100 million jobs, support 10 million profitable businesses and serve 2 billion consumers worldwide. This would make Alibaba the world’s fifth-largest economy.
And that’s where things get interesting. Companies like Google, Amazon, and Facebook (NASDAQ:FB) have been in the government’s crosshairs for being monopolistic. As I see it, if Alibaba were a U.S. company they would trump (no pun intended) all the other FAANG stocks in being the villain of the 2020 campaign. Politicians seeking to score political points would look at Alibaba and cry monopoly. Then, like they’ve done with American big tech, they would look to break it up, or at the very least regulate it.
BABA Stock is not Immune to Trade Troubles
I don’t know if American politicians are upset with Alibaba. If they are, the best they can do is to punish Alibaba via the trade war. I’m not suggesting that BABA is the target of the trade war. However, Alibaba stands to lose access to U.S. investor capital.
A report from Bloomberg News said the White House was considering blocking government pension funds from investing in China. Bloomberg also reported that the White House was considering delisting Chinese stocks from American exchanges. This would be a more substantive blow.
However, perhaps as part of the “trade truce” between the two countries, U.S. Treasury Secretary Steve Mnuchin said that the Trump administration “is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time.”
This report followed a CNBC report stating the White House was considering curbing U.S. investment in China. The move was being considered to “protect U.S. investors from excessive risk due to lack of regulatory supervision.”
This gets to the heart of the matter. In 2013, The United States and China signed a memorandum of understanding that included a clause that allows Chinese companies to withhold certain documents from U.S. regulators. The significance is that, particularly prior to its IPO, Alibaba was being accused of irregular accounting practices. However, perhaps to appease American investors, in 2015, the Chinese government cracked down on Alibaba. This caused then CEO Jack Ma to say the company was indeed not too big to fail.
What is the Real China Price that Alibaba Stock has to Pay?
My InvestorPlace colleague Will Healy made the argument that Alibaba stock has already priced in the geopolitical effects of the trade war and the ongoing turmoil in Hong Kong. However, while the Chinese like to save face, so will American corporations and investors. Right now, the optics surrounding China are not favorable. Will American corporations and investors make a conscious efforts to limit their exposure to China? If, and that’s a big if, it would have an undetermined effect on BABA stock.
The Chinese desire to save face is cultural. The American desire to do the same is more circumstantial. In time (but in fairness, nobody can say when) the current issues surrounding China will fade. Once that occurs, American investors will almost certainly take a renewed interest in BABA.
For now, uncertainty is the price that investors in Alibaba stock are going to have to pay. But if they do, the payoff in a world with less tension toward China should be immense.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.