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Avoid Alibaba and Its Complex Mix of Political and Economic Drama

Alibaba (NYSE:BABA) is a very interesting investment, being the second-largest Chinese company by market capitalization behind only Tencent (OTCMKTS:TCEHY). Often called the Amazon (NASDAQ:AMZN) of China, BABA stock represents a play on multiple fronts — from e-commerce to the cloud and more.

Alibaba Stock
Source: Nopparat Khokthong / Shutterstock.com

This name has a mix of extremely enticing features and prospects. The stock can be classified as both a growth and value pick and the company has strong fundamentals. However, BABA has a lot of risks as well. For example, it recently witnessed a selloff due to regulatory headwinds. Now at the $150 level, it’s just flat-out difficult to evaluate the risks and rewards of buying Alibaba.

So, what’s the wisest move to make with this name? Here’s what you should know about BABA stock moving forward.

BABA Stock: The Difficulties of Investing in China

To start our examination of BABA stock, maybe it’s best to begin with where the company is based: China.

What I find fascinating about the stock market is that it’s always full of news. The markets rarely exhibit calm — they are constantly taken up with earnings or political decisions that move stocks up and down. That makes sideways movements rare. But when it comes to Chinese stocks, it can be even harder to keep up. That’s part of what makes investing in China-based companies full of risk.

Of course, today the country is one of the largest global economies. China comes in second for the most billionaires in 2021 according to Forbes. So, investing in its companies seems like an inevitability. But just as with any other country, things work differently from place to place.

Most recently, Chinese stocks exhibited risk due to the country’s tech crackdown — a severe political and economic event that has hurt several names. BABA was one of the stocks hit hard. My point? When it comes to Chinese stocks like this one, you should be paying even closer attention to market news. And that’s at the very least.

Risks, Bottom Fishing and a Huge (But Fair) Fine

So, let’s take a look at the impact of the crackdown on BABA stock. Was the situation “fair” on the company?

Back in May, I included BABA stock in an article and mentioned that the company is “expected to be among the top leaders in global e-commerce in the years to come.” But back in April, Bloomberg also reported that China fined Alibaba $2.8 billion “after an anti-monopoly probe found it abused its market dominance.”

Here, the anti-monopoly probe signals to me that the fine was fair, especially since Alibaba accepted the punishment outright. After all, any monopoly in any sector is bad for consumers in the long run. Alibaba had violated some basic rules.

Now, though, BABA stock is down 35% year-to-date (YTD). So, does this mean it’s suitable for bottom fishing?

If it was not for these regulatory woes, I would say that it’s a real bargain at the current price. The company’s fundamentals are great. For example, it has three-year annualized revenue growth of 42% according to Morningstar as well as three-year annualized diluted earnings per share (EPS) growth of nearly 31%. Alibaba has strong, positive free cash flows as well. Finally, MSN data suggests that the name is relatively undervalued.

However, that all said, I have doubts. To me, the regulatory headwinds do not suggest that Alibaba’s real bottom is near. Plus, there is another factor that worries me here.

A Slowdown in Economic Growth

When it comes to BABA stock — and really Chinese stocks altogether — I’m worried about a bigger trend. Specifically, recent data showed that an economic slowdown in the country is evident. Yahoo! Finance noted the following:

“Key economic data out of China pointed to a much sharper-than-expected deceleration in growth last month, suggesting the recovery in the world’s second-largest economy was losing steam at a faster rate than expected […] China’s retail sales grew just 2.5% in August over last year […] Industrial production also pulled back for the manufacturing-heavy country.”

If this economic slowdown continues, then things do not look so rosy for BABA. Evidently, the news has already sent shares in Alibaba lower, as well as shares in companies like JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD)

The Bottom Line on BABA Stock

When it comes to BABA stock, I see a lot hard-to-quantify danger. Case in point? The government’s attempts to regulate its big tech companies. While the regulatory headwinds may be warranted in some cases, they also add a level of difficulty to Chinese stocks at large.

That’s just one of my issues with Alibaba. Therefore, although I like the stock based on its fundamentals, I would suggest staying away for now. The implications of this crackdown may last a lot longer than you’d think.

As the character Gordon Gecko put it, the most valuable commodity is information. Right now, we lack the information necessary to really evaluate BABA. It’s surrounded by drama, both economic and political. Avoid this one for now.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.


Article printed from InvestorPlace Media, https://investorplace.com/2021/09/avoid-baba-stock-and-its-complex-mix-of-political-and-economic-drama-alibaba/.

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