The Trump administration doesn’t want you to invest in Alibaba Group Holding (NYSE:BABA). They have a put on Alibaba stock, a bet its value can be pushed down.
I disagree. If you’ve been listening to me, you’re making money. Alibaba shares are up 34% for 2020, 41% just in the last three months. The stock opened for trade August 27 at about $289/share. That’s a market cap of $783 billion, and 85 times last year’s earnings.
Shares are now supported by a listing in Hong Kong, launched last November. The new listing gives Alibaba easier access to Chinese investment capital. Shares are also supported by the coming IPO of Ant Financial. Alibaba owns one-third of Ant.
Ant shares will be listed in Shanghai and Hong Kong. Ant made $1.3 billion of profit during the pandemic quarter ending in March. Its IPO has an estimated value of $225 billion.
Trump Threats to Alibaba Stock
Despite all the good news, the Trump administration continues to pile pressure on China’s most powerful Cloud Emperor.
The threat to de-list Alibaba made the stock less popular with hedge funds. While demanding the sale of Chinese app TikTok, Trump hinted darkly of more actions against Chinese companies.
Only 7% of Alibaba revenue comes from outside China. But Alibaba’s TMall, which now has an English-language version, features dozens of American brands like Apple (NASDAQ:AAPL) and Nike (NYSE:NKE).
Secretary of State Mike Pompeo recently named Alibaba in a speech, demanding American companies take Chinese technology out of their networks. The administration also wants to cut off access to Tencent Holding’s (OTCMKTS:TCEHY) WeChat. This would make it much more difficult for Chinese living in the U.S. to connect with relatives in China.
Taiwan has also ordered Alibaba to divest the Taobao Mall it operates there. The ownership had been hidden behind a British company. The U.S. considers Taiwan an ally. China considers it part of China.
Alibaba Success
China’s economy is re-opening while the U.S. remains closed by the COVID-19 pandemic.
In Alibaba’s June quarter report, released August 20, revenue was up 34% year over year. Profits more than doubled. About 30% of the company’s $21.76 billion of revenue hit the net income line. That’s because Alibaba doesn’t hold merchandise. Its cloud computing and Ant Financial units also help bring its profitability closer to that of Facebook (NASDAQ:FB) than Amazon (NASDAQ:AMZN).
Alibaba has a more powerful cloud than any U.S. cloud czar. By that I mean its software is more valuable. It does accounting and business management like Microsoft (NASDAQ:MSFT). It handles financial transactions like Visa (NYSE:V). It also offers digital content services, like Amazon, including gaming.
While America’s Cloud Czars are under antitrust threat, China has given Alibaba a green light to grow. Susquehanna Research recently raised its price target on Alibaba, to $350, 21% ahead of its current price.
The Bottom Line
I consider Alibaba a long-term holding. Cloud computing will remain a strong area throughout the coming decade. Alibaba is best positioned among all the cloud giants to profit.
The Trump put is keeping shares down. But the value of that put declines as Election Day approaches. Trump remains behind Democratic candidate Joe Biden in polls.
If Trump overcomes his 10% polling deficit and wins, I might be forced to sell my Alibaba shares. I took my first position in 2016, at a price of $93. My most recent purchase, in July, carried a price of $175. I can cash out and make money.
But I’m not interested in selling. Call my position a Biden call.
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. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA, AAPL, AMZN and MSFT.
