There’s no question the past couple of months have been rough for Alibaba (NYSE:BABA) investors. But after a huge sell-off, it’s time to hold your nose and buy BABA stock.
It’s hard to find a stock dealing with as much headline risk as Alibaba is today. But negative headlines come and go. Meanwhile, Alibaba’s business is booming. Its stock is cheap. And it is still the best way for investors to play massive long-term growth trends such as a rising Chinese economy, a global shift to e-commerce and the proliferation of cloud computing.
Here are three reasons to buy BABA stock after the recent sell-off.
BABA Stock Isn’t Getting Delisted
I have repeatedly said BABA stock isn’t getting delisted. Yes, President Donald Trump issued an executive order to ban certain Chinese stocks with alleged tied to the Chinese military. But Trump has had multiple chances to ban Alibaba and has not done so.
Trump now has less than 10 days left in office. If he were going to pull the trigger on a BABA stock ban, he would have done it already. Meanwhile, I’m guessing one of President-elect Joe Biden’s top priorities upon entering the White House will be to attempt to normalize trade relations with China. Biden might not roll back all of Trump’s anti-China policies. But I can’t see him making things worse by banning China’s biggest tech company.
Wall Street doesn’t want BABA stock delisted. Investment banks don’t want to miss out of the cash cow of Chinese IPOs and offerings. In addition, asset managers such as Blackrock (NYSE:BLK), Vanguard and T. Rowe Price are reportedly among Alibaba’s largest shareholders. They certainly don’t want to deal with the chaos that would be involved in banning a $600 billion company. Asset managers were reportedly lobbying hard for Alibaba to stay off of any U.S. blacklists. If you think Wall Street doesn’t have major political pull in Washington, you’re delusional.
China Will Not Cripple Alibaba
Contrary to what Elon Musk says, China does not have a good track record when it comes to human rights and free speech. Alibaba founder Jack Ma learned that lesson the hard way when he dared to criticize China’s banks in a speech back in October.
Chinese regulators and the Communist Party responded by scrapping the IPO of Alibaba affiliate Ant Group. They also issued a regulatory crackdown and probe into Alibaba’s business for alleged monopolistic practices.
The fallout from Ma’s words sent BABA stock crashing from as high as $319 back in October down to around $244 on Jan. 14. But in the end, investors have to expect China to do what’s best for its country.
The Chinese Communist Party (CCP) does not want to crush Alibaba. They don’t want the world to see that its highest-profile technology success story will be dragged down by its own government. Instead, what they want the world to see is that even Alibaba and Jack Ma must stay in line. They are demonstrating to the world that no company or no man is more powerful in China than the CCP. That’s it.
In my mind, they’ve already accomplished that goal. There were even rumors circulating that Jack Ma might have been killed or imprisoned, although those rumors are apparently not true. But the point is that the CCP reminded the whole world who is in charge and the type of harsh consequences Chinese businesses face when they get out of line.
I’m expecting a quick “investigation” and some minimal fines and tweaks to Alibaba’s business model. I also wouldn’t be surprised to see Ant’s IPO back on the table by the end of 2021.
Alibaba’s Business Is Booming
From the trade war to delisting threats to regulatory crackdowns, Alibaba faced one negative headline after another in the past few years. Yet through all the news, Alibaba’s underlying business is crushing it.
Last quarter, Alibaba reported 30% revenue growth and $28.8 billion in net income. BABA stock trades at just 18.8 times forward earnings, an absurdly low valuation for a stock with Alibaba’s growth numbers.
Alibaba operates in the same high-growth tech fields of e-commerce and cloud services as Amazon (NASDAQ:AMZN). In the past five years, Amazon’s revenue is up about 206% while its stock is up 424%. Alibaba’s revenue growth in that time is about 200% higher at 425%. Its stock gains, on the other hand, are about 200% lower at just 233%.
At some point, negative headlines always pass. What matters is the underlying business. Alibaba is the market leader in the biggest emerging market economy and in the biggest tech markets of the 21st century. If you buy BABA stock today, you’ll be glad you did five years down the line.
On the date of publication, Wayne Duggan held a long position in BABA.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.
