To successfully invest in a Chinese company like Alibaba (NYSE:BABA), one has to keep tabs on that country’s economy and the preferences of its consumers. If Chinese consumers are fearful, for example, then it might not be the ideal time to own Alibaba stock.
When the onset of the novel coronavirus put pressure on the Chinese economy earlier this year, it was certainly a challenging time to hold Alibaba stock. By July, however, the company’s share price recovered, as the Chinese economy appeared to be in recovery mode.
Appearances can be deceiving, however. Chinese shoppers might be willing to spend their money now, but they’re doing it differently than before the pandemic. With a dramatically changed consumer landscape, is Alibaba stock still a strong buy now?
A Closer Look at Alibaba
What’s interesting about Alibaba stock is that it has offered so many buy-able dips. For instance, its share price fell hard in 2018’s second half, mostly as a result of tensions between the United States and China. Yet the stock staged a recovery in early 2019.
Other dips occurred in May 2019 and March 2020, but the shares climbed back to their former peaks in both instances. Even the global pandemic evidently wasn’t enough to keep Alibaba bulls out of the game for long.
After peaking slightly above $260 per share, Alibaba stock took a breather in the final trading sessions of July. Examining the state of commerce in China will help to clarify whether there’s still gas left in the tank for Alibaba’s shareholders.
China Shops Differently
Investors must understand that the pandemic has induced changes that, to a certain extent, are likely to be permanent. One such change is how consumers shop.
According to China’s National Bureau of Statistics, the nation’s online sales of physical goods increased by 25% in June on a year-over-year basis. The same metric jumped 16% in April followed by a 22% increase in May.
Thus, not only is the online sales of physical goods increasing YOY every month, but the rate of increase is itself climbing.
This is also happening from one quarter to the next. Specifically, China’s online sales during the first quarter rose 6% YOY. That figure jumped to 21% in Q2.
Even with economic concerns lingering in China, Stifel analyst Scott Devitt nonetheless drew a bullish conclusion from the available data:
“Overall, we believe macro concerns remain but view China e-commerce as well positioned to gain share of retail dollars with the potential for more permanent shifts in consumer buying behavior in certain categories in favor of online players.”
Alibaba Is Still Number One
Obviously, Devitt was referring to Alibaba when he alluded to “online players.” While reaffirming his “buy” rating on Alibaba stock, Devitt hiked his price target from $230 to $270.
So, if you’re concerned that China’s shopping activity has ground to a halt, you can relax. The nation is still shopping, but consumers are moving online. And that should be just fine for Alibaba’s shareholders.
Granted, Alibaba isn’t the only company in the Chinese e-commerce space. Yet the company continues to reign supreme in this area. I must give InvestorPlace contributor Wayne Duggan credit for opening my eyes to just how dominant Alibaba is in the Chinese e-commerce sector.
As Duggan points out (using data from Bank of America), Amazon (NASDAQ:AMZN) holds a 44% share of the U.S. e-commerce market. That’s pretty impressive, no doubt. You might think that Alibaba couldn’t possibly be as dominant as Amazon.
However, you’d be mistaken if you thought that. As reported by Statista and noted in Duggan’s article, Alibaba “holds a 55.9% share of total retail sales in China” and “roughly three times the market share of JD.com (NASDAQ:JD), which is a distant second with a 16.7% share.”
The Bottom Line
Concerns over the Chinese economy are understandable. Yet the owners of Alibaba stock do not have to worry or dump their shares.
China hasn’t stopped shopping, though e-commerce has changed how people shop there. Moreover, Alibaba is still the undisputed king of e-commerce in China.
In fact, one could even argue that Alibaba is bigger than Amazon. And if that doesn’t convince you to buy and hold Alibaba stock, I don’t know what will.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
