Chinese e-commerce giant Alibaba Group Holding (NYSE:BABA) stock has been in a bit of a slump this month, due in large part to the coronavirus that is sweeping through China and threatening to be a global epidemic. CEO Daniel Zhang even called it a “black swan” event that will weigh on future earnings and possibly disrupt the global economy.
Terrifying stuff, taken at face value. Does this mean it’s time to drop Alibaba stock from our portfolios and write off one of the biggest publicly traded companies in China?
Alibaba Stock and the Coronavirus
Alibaba is coming off another great quarter and saw record sales during its Singles Day promotional event. It reported Q3 sales of $23.2 billion — growth of 38% — and reported earnings per share of $2.61. That beat expectations of $22.9 billion in revenue and EPS of $2.28 per share.
But the company’s stock is trading relatively flat so far in 2020, trailing the S&P 500, which has seen a 3.5% gain. That’s because of fears of the coronavirus, which emerged in December in China and has since infected more than 70,000 around the world. More than 2,000 have died, most of them in China. The death toll already surpassed the 2003 SARS virus, which also began in China and infected more than 8,000.
“The epidemic has negatively impacted the overall China economy, especially the retail and service sectors,” Chief Financial Officer Maggie Wu said in a conference call. “While demand for goods and services is there, the means of production in the economy has been hampered by the delayed opening of offices, factories and schools after the Lunar New Year’s holiday.”
Zhang told reporters that Alibaba is already seeing changes in buying patterns, particularly in deliveries with electronics and clothing. The company will also see a downturn in travel bookings and restaurant orders, which will hurt Alitrip and its delivery business.
“It will present near term challenges to Alibaba’s businesses across the board,” Zhang said.
However, the reality is that this is really just a short-term blip for the company.
Alibaba Has Enormous Growth Potential
Alibaba began trading publicly in the U.S. in 2014, launching with a $231 billion market cap — the largest IPO in the world at that time. Just six years later, Alibaba has a market cap approaching $600 billion.
The reason for that growth? China’s economic engine.
Dubbed the “Amazon.com (NASDAQ:AMZN) of China,” Alibaba is the biggest e-retailer in China and is responsible for shipping groceries, clothing, electronics, and any number of goods to consumers in China. And while the China’s economic growth has started to slip in recent years, it’s still a beast.
Last year, China’s economy expanded by 6.1%. And while that’s Beijing’s slowest growth rate in 30 years, it still beats the United States, which saw an expansion of less than 3%.
Similar to Amazon, which is seeing dynamic growth in its AWS cloud computing products, Alibaba’s cloud division is also developing to be a powerhouse to complement its e-commerce efforts. Its cloud computing revenue grew 62% in the last quarter to $1.5 billion.
“We believe the migration of the core systems of Alibaba’s e-commerce businesses onto the public cloud is a major milestone that not only is generating greater operating efficiencies for Alibaba but also will encourage more customers to adopt our public cloud infrastructure,” the company said in its earnings report.
And don’t forget — Alibaba began trading last November on the Hong Kong stock exchange for the first time, grossing $13 billion from that IPO. The company plans to use revenue from the Hong Kong listing to drive its user growth and engagement strategies, giving Alibaba an even bigger advantage in the e-commerce field.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.