Don’t Ignore the Major Threats Facing Alibaba Stock

Tougher competition and a potential antitrust crackdown loom over BABA's near term

Without a doubt, Alibaba (NYSE:BABA) has many huge opportunities, including the growth of its cloud business, the continued expansion of e-commerce in China, and the company’s overseas growth. All of these positive catalysts could easily propel Alibaba stock much higher.

Don't Ignore the Major Threats Facing Alibaba Stock
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But the Street seems to be overlooking the fact that the company is also facing multiple threats that could easily cause the company’s shares to remain range-bound or even meaningfully decline.

The most important of these threats is the combination of increased competition and a potential Chinese government crackdown on BABA’s alleged antitrust behavior.

Competition in the Core E-Commerce Market

In recent years, BABA’s competition in the Chinese e-c-commerce market has intensified, with JD.com (NASDAQ:JD), the sector’s number two player, getting stronger and discount e-commerce company Pinduoduo (NASDAQ:PDD) emerging as another key rival for BABA. In the third quarter, JD’s net revenue jumped 29% year-over-year, and its operating income more than quadrupled YoY. Meanwhile, Pinduoduo’s top line jumped by a very impressive 123%, and its average monthly active users soared 85% YoY to nearly 430 million.

Both companies could easily start taking more market share from BABA, with the threat from Pinduoduo growing particularly quickly.

Apparently, BABA also recognizes the Pinduoduo threat; Alibaba has allegedly threatened to prevent thousands of merchants who sell their products on Pinduoduo from continuing to utilize BABA’s platform, Tmall.

But Beijing may be losing its patience with such anti-competitive practices, as it’s reportedly working on crafting a new law that will allow it to fine companies that engage in anti-competitive practices up to 10% of their annual revenue.

If the authorities crack down on BABA’s alleged threats, many more merchants could join Pinduoduo or sell their products to JD (the latter company offers products to consumers directly). As a result, the two rivals’ product assortments could become more attractive to consumers, causing some loss of BABA’s market share, leading to a likely inevitable Alibaba stock drop.

And like the American company with which it’s often compared, Amazon (NASDAQ:AMZN), BABA could come under pressure from brick-and-mortar stores that greatly step up their e-commerce business. But unlike Amazon, Alibaba’s shares won’t be supported by a profitable cloud business; BABA’s cloud unit is still racking up negative numbers, as it generated a $274 million loss in Q3.

Potential Catalysts of Alibaba Stock

Some of Alibaba’s potential catalysts are little-known or underappreciated. It’s starting to try to convince American small businesses to sell their products on its websites. If the initiative is successful, BABA could greatly increase its product assortment, resulting in many more sales and meaningfully higher revenue and profits.

And fears about the coronavirus spreading in China could prevent people in from going out to shop; as a result, many of them could turn to e-commerce instead, boosting Alibaba’s results for this quarter. Moreover, the company is stepping up its efforts to market its offerings to medium-size cities in China.

To unlock these opportunities, management can can use the proceeds from the recent Alibaba Hong Kong listing to bankroll major marketing campaigns.

And of course, there are its more well-known growth opportunities, including its cloud business (even though the unit is still unprofitable, it’s expanding rapidly) and its efforts to penetrate Southeast Asia and India, where Alibaba’s had mixed success. The company’s financial services subsidiary, Ant Financial, and its streaming video units also have tremendous potential.

Bottom Line on Alibaba Stock

BABA has tremendous opportunities, but it also has dangerous, looming threats. Moreover, trading at a trailing P/E ratio of 62 and not far from its all-time highs, Alibaba stock certainly isn’t cheap.

I think that investors can and should avoid BABA and instead buy other stocks that are either cheaper or face less intense threats or both.

As of this writing, the author did not own shares of any of the aforementioned companies. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/dont-ignore-the-major-threats-facing-alibaba-stock/.

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