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Amidst the Indo-Chinese Crisis, Alibaba Stock Still Looks Like a Buy

China's foreign relations are proving to be a major headache for Alibaba

Chinese businesses have been under siege worldwide this year. For instance, India banned 59 Chinese apps, including those from tech giants such as Alibaba Group (NYSE:BABA) and Tencent Holdings (OTCMKTS:TCEHY), amid escalating military tensions. The implications for Alibaba stock are worth considering.

Zombies and Bears Beware, Alibaba Stock Will Still Defeat You!
Source: Shutterstock

Additionally, due to security reasons, China’s Huawei’s 5G overseas expansion plans have essentially been nipped in the bud. On top of that, the novel coronavirus pandemic has crippled consumer demand and has had a devastating impact on export orders. Despite this, Alibaba stock gained 10% this month.

Alibaba’s continued innovation has enabled it to dominate the Chinese and Asian online retail market. Recent developments in the cloud and digital payments sphere has helped offset losses in its core business. Two of these areas could potentially become significant catalysts for the company’s success in the future.

Let’s dive a little deeper into the company’s situation to have a better understanding of how its positioned

Two Major Catalysts for Alibaba Stock

Alibaba continues to innovate and find ways to diversify revenues. For Alibaba, developments in its fintech and cloud business are pushing Alibaba stock higher. The company plans to get Ant Group, its fintech affiliate company listed on the Hong Kong Stock Exchange. Up to 15% of shares will be offered in its initial public offering, where analysts are estimating its value to be between $150-200 billion.

Ant Group mobile payment service called Alipay has become a mainstay in the Chinese retail industry, and it wouldn’t be surprising if many of its users would clamor for its shares. Therefore, a successful IPO would only fuel Alibaba’s upward climb.

Alibaba’s cloud business has been on fire for the past several quarters. Revenues from its cloud sector for the quarter ended March 31, 2020, were $1.725 million, an increase of 58% year-over-year.

China’s cloud infrastructure services spend 67% year-over-year in the first quarter of 2020. Alibaba took 44.5% of that share, putting it in firm control of that space. However, off late, Huawei has been making moves in the cloud sector, beating Tencent Holdings and Baidu (NASDAQ:BIDU) in the first quarter of 2020.

Some exciting prospects await the company’s cloud wing. Through its partnership with Intel, Alibaba will be bringing cloud broadcasting for the Olympic Games and the Winter Olympics in Beijing 2022. With the market for cloud solutions to grow to $331 billion by 2022, expect Alibaba to take advantage of a whole host of opportunities through its infrastructure.

Valuation

Alibaba stock was trading at 266% higher than its IPO of $68 back in September 2014. The company’s growth story never ceases to amaze as it remains one of the largest companies in the world.

One of the most impressive aspects is its net margin, which is at 29.3%, second only to eBay (NASDAQ:EBAY) at 44.7% among its top competitors. One of the reasons why it’s so profitable compared to competitors such as Amazon is that it doesn’t directly fulfill its online orders with a logistics network. It merely charges listing fees and commissions, which makes it a pure it purely an advertising platform.

Analysts predict that the company’s stock price should be around $282, which means that it is trading at a 13% discount to its current stock price. It’s difficult to forecast its stock price considering the risks it faces at this time. However, with a better showing in the upcoming quarters and harmonization of China’s issues on an international front, I expect the stock to push higher.

A Word on the Indo-Chinese Crisis

The Indian government recently banned 59 Chinese apps in response to a deadly clash between the Chinese and Indian forces in the Ladakh region, which killed at least 20 Indian soldiers.

These growing differences are creating significant problems for Alibaba, which has invested heavily in India. The company has invested over $6 billion in India and relying on the country as a key driver for its overseas expansion plans.

The ban covers Chinese apps which are directly operated by Chinese internet companies, but it could so be extended to Indian apps supported by Chinese entities.

Alibaba has substantial investments in different Indian services, such as a 40% stock stake in Paytm, a leading digital payments app in the country, and is the largest single shareholder of Zomato, India’s leading food delivery platform.

Amazon (NASDAQ:AMZN) has also invested in several services in India, and this temporary ban on Chinese apps could allow Amazon to gain a significant advantage during the period.

Bottom Line on Alibaba Stock

Alibaba’s diversified revenue mix has essentially made it a pandemic proof stock. However, its near term challenge cannot be ignored, especially the developing Indo-Chinese crisis. Hopefully, the situation with the two countries improves, especially after recent reports of border dialogue and military talks. Therefore despite its near term challenges, Alibaba stock is still a buy.

As per this writing, Muslim Farooque did not hold a position in any of the aforementioned securities


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/amidst-indo-chinese-crisis-alibaba-stock-still-a-buy/.

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