What to make of Alibaba (NYSE:BABA)? The Chinese e-commerce company has been in growth mode for the past five years. The company’s core online sales business recovered quickly from the novel coronavirus pandemic, barely breaking stride. Meanwhile, revenue from its Cloud-computing division is increasing by leaps and bounds. As October wound down, BABA stock had posted 44% growth in 2020. Since then, it’s slipped into an extended slump. Does that make BABA a buying opportunity, or is there more to the story?
BABA stock has performed well over the past five years. Up until the end of October, shares had increased in value by 290% since the end of 2015. That’s pretty solid growth. However, since then, BABA has slumped 17%. And there is the potential for things to get a whole lot worse.
That shadow hanging over this stock is a big part of the reason why it has a “B” rating in Portfolio Grader.
Alibaba Beat Q3 Earnings
Singles’ Day is a huge shopping event in China. The “day” part is misleading, because the event actually covered multiple dates between Nov. 1 and Nov. 11. This year, Alibaba absolutely smashed its 2019 numbers. The $74.1 billion dropped by Chinese consumers for Singles’ Day was nearly double last year’s spending.
Singles’ Day was no fluke.
On Nov. 5, Alibaba reported its third-quarter earnings. Revenue was up 30% year-over-year (YoY). Revenue from the company’s Cloud-computing business grew 60% YoY. The company beat analyst projections for both revenue and earnings.
So, why did BABA stock get a one-day pop and then continue heading down?
Threats Hang Over BABA Stock
Two issues are hanging over Alibaba.
First, is the threat of regulation in the tech industry by the Chinese government. Alibaba has a 33% stake in Ant Group, which was set to be the world’s biggest initial public offering (IPO). On Nov. 6, the Chinese government pulled the plug on the offering, citing concerns that Ant was becoming an internet finance monopoly.
It’s not just American tech companies that are facing government scrutiny and the threat of closer regulation because of their alleged anticompetitive behavior. The move had a big impact on Alibaba, but it has also had a cooling effect on Chinese tech stocks in general. Within days, Chinese tech firms had lost some $280 billion in market value.
In addition, Chinese stocks face the ongoing threat of delisting on American markets if they refuse to submit to audits by American regulators. Under the current climate of animosity between the two countries, that’s a big ask.
Harvard Law School professor Jesse Fried recently warned, “Beijing is unlikely to back down, leading to a tsunami of delistings and cheap take-privates that hurt current investors in China-based firms.”
On Dec. 18, President Donald Trump signed the Holding Foreign Companies Accountable Act. That starts the timer ticking for the Chinese companies to comply with the new rules. Once the bill is law, they have three years to adhere to American auditing standards before being delisted.
The Bottom Line
You know the good and the bad about BABA stock, so the question is, should it be part of your portfolio? It all comes down to risk tolerance. That’s the case with all stocks, of course, but with Alibaba the equation is different. I don’t think there’s any doubt that this is a company on a growth trajectory. All things being equal, BABA stock should be a stellar choice.
Standing in its way is the risk of delisting, a factor that has weighed heavily on Alibaba shares in recent weeks. Adding to the concern is the fear of Chinese government regulation.
If the worries about delisting and stricter regulation were lifted — always possible with a new administration in the mix — Alibaba shares would likely take off once again. Whether that happens or not, there are still three years to make the most of BABA’s growth potential.
Most investment analysts appear to agree with my take on this. Among the 55 tracked by the Wall Street Journal, 50 have BABA rated as a buy, with three rating the stock as overweight. The two holdouts have it rated as a hold. Their average 12-month price target of $340 offers 32% upside.
Assuming we can get through this current crisis, BABA stock has everything needed to get back on the path to rewarding, long-term growth. However, if the relationship between China and the U.S. doesn’t warm up, or if the Chinese government gets more aggressive about regulation, the risk element in owning BABA shares is going to increasingly ratchet up over the next several years.
On the date of publication, Louis Navellier had a long position in BABA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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.
