Alibaba (NYSE:BABA) stock continues to baffle traders. It has traded in a narrow range between $160 and $180 for most of this year. You’d have to go back to the beginning of 2017 to find the last time BABA stock made a major move up or down. If you’ve been looking for big moves, BABA stock has not been the place to focus.
That’s especially surprising, as there has been plenty of news. Alibaba reported all sorts of growth and new business initiatives. Rivals such as Pinduoduo (NASDAQ:PDD) have completed their Initial Public Offerings and achieved considerable success.
On the negative side, the trade war has gotten worse over the past year. Now, its effects appear to be spilling over into the broader economy, with Chinese economic statistics turning down. The recent protests and violence in Hong Kong have added to some traders’ anxiety. What’s it all mean for Alibaba stock?
Investors Are Shunning Chinese Stocks
Our Will Healy rightly noted that investors are assigning a “China discount” to all companies based out of that country. In addition to the omnipresent trade war headlines, there are more specific reasons for concern as it pertains to BABA stock.
For one thing, Alibaba decided to cancel its proposed stock offering in Hong Kong. That makes sense given the rise in political unrest in that city. Still, Alibaba would have liked to have the extra liquidity. An additional stock listing in particular would be nice given the next factor.
The Trump administration is floating proposals that would stop Americans from investing funds in Chinese stocks. While it’s unclear if there’s a realistic path to making any of it law, Chinese companies are already fearing the worst. Given the current optics around Chinese stocks in the U.S., BABA would be a more trustworthy holding if it could establish a second listing, be it in Hong Kong, London, or some other international financial capital.
How Alibaba Stock Can Continue to Grow
Online retail sales growth in China has slowed down dramatically in recent years. Some of that is likely due to the challenging macroeconomic environment. But a big part is also due to saturation of the big Tier 1 and Tier 2 city markets in China.
As a result, Alibaba has been moving into smaller cities and even more rural areas of China to try to keep up its impressive growth rate. In doing so, Alibaba Group is moving into more direct competition with the fast-growing Pinduoduo. Pinduoduo is reporting triple-digit revenue growth, and just saw its stock price double in recent months after a massive earnings report.
In addition to Alibaba’s efforts to reach less urban China, watch overseas expansion. Alibaba continues to make aggressive attempts to expand outside of China. Companies that have focused primarily on the domestic market, like Baidu (NASDAQ:BIDU), are really struggling as of late. BABA’s international diversification could be a saving grace given the growing trade war troubles. On the other hand, Alibaba is spending heavily on acquisitions and overhead to move into so many foreign markets, so watch the impact on its margins this quarter.
BABA Settles Class Action Lawsuit
Normally, shareholder lawsuits against companies don’t amount to much. There are always exceptions, though. Two weeks ago, a New York judge approved Alibaba’s $250 million dollar settlement to BABA stockholders of record in 2014-15.
What happened? Shareholders alleged that Alibaba inflated the valuation of its IPO by concealing an active investigation into the company. China’s State Administration for Industry and Commerce was probing Alibaba for permitting the sale of counterfeit goods on its site prior to the IPO. Yet Alibaba reportedly failed to disclose this fact to prospective American investors. Once publications reported about the Chinese investigation into fake goods, BABA stock tanked nearly 13% on the news.
Shareholders rightly became furious, and sued the company. And they actually won a respectable judgement; $250 million isn’t a back-breaker to a company of Alibaba’s size, but it’s more than you’d usually expect from this sort of lawsuit.
BABA Stock Verdict
I’ve never owned BABA stock, and that’s unlikely to change anytime soon. The company’s accounting practices make it a bit of a black box. Sophisticated short sellers that have pointed out other wrongdoing at Chinese-listed firms insist that Alibaba is problematic. And, as we saw with the class action lawsuit settlement, American investors may end up being the last to know if something goes wrong with the business.
As it turns out, you have a more credible rival to Alibaba, JD (NASDAQ:JD) that also trades at a far cheaper valuation based on its sales. BABA stock may work out well for shareholders, particularly if there is a speedy resolution to the trade war. Also, keep in mind, Alibaba is slated to report earnings Friday before market open. This could boost Alibaba stock as well, depending on what sort of numbers they report. Long-term, though, Alibaba stock is a ton of risk for its modest potential upside.
At the time of this writing, Ian Bezek owned JD stock. You can reach him on Twitter at @irbezek.
