Coronavirus Fears Are Weighing on Alibaba’s Success Story

Alibaba shares are struggling despite an excellent December quarter. It's time to buy some now.

Alibaba (NYSE:BABA) stock remains about where it was at the start of the year, despite a spectacular December quarter.

Alibaba Stock Has a Great Future, but Its Present Is Risky and Pricey
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Net income of $6.7 billion, $2.61 per share, was up about 56% year-over-year. And revenue of $23.2 billion, up 38%, sent shares up $6 initially. But air started coming out of them almost immediately. They opened Feb. 18 at $218.55, not far from where they started the year.

With a market capitalization of $589 billion, analysts are now calling Alibaba undervalued, with a valuation under six times next year’s sales. But it’s obvious why that is.

Blame the Virus

The reason is the coronavirus from China, expected to hit this quarter’s results hard, and hit China’s economy harder.

This is true despite Alibaba being a big part of the economic cure. Millions of companies and their employees are now using Alibaba’s DingTalk network to resume work from home. The company has offered $2.9 billion in loans to businesses hit by the virus. The Alipay payment network is using QR codes to track sufferers in its hometown of Hangzhou. The government calls it an artificial intelligence-based fever screening system.

Alibaba has set up a special platform with medical supplies to fight the virus. Its Tmall is offering businesses lower shipping costs and waiving agency service fees. Founder Jack Ma has personally donated $14.5 million to the fight.

All this illustrates how the China suffering from the current outbreak is very different from the one hit by SARS in 2003. That virus only sickened about 8,100 people, but nearly 10% of them died. The current outbreak has hit over 73,000 people, of whom almost 1,900 have died.

Coming Back Stronger

Alibaba’s technical and financial strength is one of the big differences between 2020 and 2003. Analysts are calling the stock’s inability to rise a buying opportunity.

From a technical perspective, that is true. Alibaba should have over $30 billion in operating cash flow this year, and already has $50 billion in cash. The company is firing on all cylinders and could easily be a $1 trillion stock later this decade.

The reason it’s cheap is obvious. Chinese investors. Alibaba went public in Hong Kong late in 2019, with shares split 8-to-1 from the American Depository Receipts traded in the U.S. The secondary listing raised $11.2 billion, but that wasn’t the point. The point was to get more Chinese into the stock. But tension between Hong Kong and China is keeping Chinese who trade in Shanghai from direct investment. Ratings on the Hong Kong version of the stock have been cut.

The Bottom Line on Alibaba Stock

Alibaba is like Apple (NASDAQ:AAPL). It’s not a stock you trade, it’s a stock you own.

I figured that out myself last year. After selling my own shares for a fat profit in the wake of growing U.S.-China tensions, I got back in at a higher price and I’m up about 30% from there.

As InvestorPlace’s Thomas Niel wrote recently, there remain multiple catalysts driving Alibaba higher. Cloud computing and a coming IPO for its Ant Financial payments unit could drive up the stock price.

It’s true the shares trade at a trailing price-to-earnings ratio of 62. They’re not far from their all-time highs. There are strong competitors within China’s e-commerce industry.

But even these headwinds can be tailwinds. They push management to continue doing what they’re best at. That is, to stand behind transactions as the most profitable company in the world.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and BABA.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/coronavirus-fears-are-weighing-on-alibabas-success-story/.

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