Take Advantage of the Alibaba Discount, But Be Aware of the Risks

Prior to the novel coronavirus pandemic, Alibaba (NYSE:BABA) stock was arguably a much easier investment proposition. Should Alibaba tumble over 20% from a recent high, like it’s doing right now, you buy the discount. It was as simple as that.

Alibaba Stock
Source: Nopparat Khokthong / Shutterstock.com

Post-pandemic, the narrative has changed dramatically. For one thing, tensions are sky-high with China and it’s not just in our nation. All over the world, negative opinion toward the second-biggest economy has put question marks on even Chinese blue chips like BABA stock.

Adding to the complexity of the situation is U.S.-China relations under the Biden administration. Of course, the current occupants of the White House have an incentive to change the framework. President Joe Biden in particular will be under pressure to prove he has a much better diplomatic approach than his predecessor, former President Donald Trump.

To say it’s a tricky situation for stakeholders of BABA stock is the understatement of the century. Nevertheless, my InvestorPlace colleagues have one by one presented bullish arguments for China’s flagship.

Our own Matt McCall, who has really pounded the table on the burgeoning technology space, recently suggested that we need to take things into perspective. Indeed, while BABA stock is technically in bear market territory relative to its all-time closing high, shares are trading above pre-crisis levels (albeit barely).

Will Ashworth acknowledged the many serious difficulties surrounding Alibaba. For instance, Chinese government crackdowns have not been conducive for the e-commerce firm’s progress. Nevertheless, he points out that history has been good to BABA stock. And there’s no overriding reason to think things will be different moving forward.

Finally, you have Mark Hake, who suggested that metrics like free cash flow put Alibaba in a surprisingly favorable light. Even with the geopolitical troubles, BABA might be worth a second look.

Bet Cautiously on Positive Signs for BABA Stock

Though BABA stock benefits from several fundamental arguments, if there’s any lesson that we learned over the trailing year, it’s this: the market is the ultimate arbiter.

This particularly applies to the meme stock phenomenon. It doesn’t matter what you think about the sustainability of an equity unit’s rally. If the market can bear it, it can bear it.

With BABA stock, the market seems to be confirming the positive fundamentals that my colleagues mentioned. Since the lows of December 2018 to January 2019, Alibaba shares have generally charted a series of higher highs and higher lows.

Admittedly, BABA has been on a downtrend since late October 2020. But the rising support line that I just mentioned (i.e., higher lows) suggests that a bullish pennant formation could be in play. If so, it wouldn’t be out of the question to see BABA rally from here.

Nevertheless, investors shouldn’t be too gung-ho on BABA stock. That’s not meant as a slight on Alibaba; I don’t think you should be gung-ho about anything in this crazy market environment.

In particular, China may see some deflationary pressure in their consumer economy. According to the New York Times, “…China is trying to get its consumers to return to their prepandemic ways, something that other countries will soon have to grapple with once more vaccines become available.”

Maybe the government there can spark robust consumer confidence, but it will be a steep challenge. In part, this is because Chinese consumers mimic our own consumption behaviors. For instance, our personal saving rate is still at multi-decade highs, which is problematic for both ends.

Naturally, higher savings translates to less funds being distributed across our economy. Logically, this has an indirect impact on China, which relies heavily on its exports. Thus, while the market appears positive on BABA stock, the narrative isn’t without faults.

Ease into Alibaba

Still, you must consider that when it comes to low-cost goods, nobody does it better than the Chinese. Yes, we Americans are screaming and crying bloody murder regarding its governmental politics across a range of issues.

And that’s not an anecdote. Instead, a recent Pew Research Center survey revealed that 89% of U.S. adults “consider China a competitor or enemy, rather than a partner.” Because tensions run deeply, the Biden administration can actually swing some votes in its favor if it implements a harder line on the Asian juggernaut.

It goes without saying that poor relations with China is not great for BABA stock. But taken as a whole, the risk-reward profile for Alibaba could be net positive. The country recovered very quickly from Covid-19 (assuming it’s not being duplicitous with its stats). Also, it owns so much of the global manufacturing base.

Therefore, the smartest approach to BABA is to lean into shares. Take advantage of this discount but be aware that further downside is also possible.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


Article printed from InvestorPlace Media, https://investorplace.com/2021/05/advantage-baba-stock-discount-but-beware-risks/.

©2021 InvestorPlace Media, LLC