In recent months, Alibaba (NYSE:BABA) stock has been weak due to worries about the Chinese government’s crackdown on some tech companies, including Alibaba.
On Sept. 20, however, it appeared that the shares were primarily sliding due to macro worries about the Chinese economy.
While I believe that the latter concern is unwarranted, I remain worried about Beijing’s antagonism toward Alibaba, which seems to still be quite active.
Since at least 2013, worries about China’s debt situation have circulated on Wall Street. For example, in December 2013, CNN warned that, “China has a growing debt problem.”
I can remember that, well before 2013, some analysts wrung their hands about a “Chinese real estate bubble” and new shopping centers in the country that were reportedly empty.
Yet through it all, China’s economy kept chugging along, and Alibaba’s revenue continued to expand meaningfully.
I believe there are two main reasons for that.
First, due to China’s huge export and manufacturing sectors, the country’s government and its financial institutions have access to tremendous amounts of money.
Those funds, unlike, say, the U.S. housing market in 2007, are derived from real, strong businesses, not from a house of cards.
Another relevant historical example is the European debt crisis last decade. At the time, much of Wall Street was certain that the crisis would destroy the Euro and that the heavily indebted European countries would default.
Yet Germany and German banks, enabled by the country’s strong, real businesses, were able to prevent the Eurozone from sustaining major damage.
Likewise, I believe that China will be able to overcome its debt problems and weak economic links going forward. As a result, I don’t expect BABA stock to be meaningfully hurt by the country’s macro issues.
Beijing’s Anger Towards Alibaba
On the other hand, there are still definitely reasons to be worried about the Chinese government’s stance towards Alibaba.
As I’ve written in past columns, I believe that the crackdown by the Chinese Communist Party on some of the nation’s firms stems from its fears that large, wealthy consumer-facing companies could spark a revolution.
Alibaba is one of China’s largest companies, and it has the ability to communicate with many tens of millions of the company’s consumers. What’s more, in November 2020, the company’s founder and former CEO, Jack Ma, harshly criticized the country’s financial system.
Since November, Beijing has implemented multiple punitive measures against Alibaba, and that trend doesn’t seem to be ending.
In fact, the Financial Times recently reported that the Chinese government is looking to “break up” Alipay, an app owned by Alibaba’s subsidiary, Ant Financial. Beijing also wants Ant to provide the government with its user data.
Meanwhile, on Sept. 10, Chinese regulators criticized Alibaba’s treatment of its workers and said that it was forcing the company, along with nine other firms, to follow new rules on how to treat their employees.
In another bad sign for BABA stock, the conglomerate promised to spend $15.5 billion on a “common prosperity” initiative launched by Beijing.
Given the large amount of money involved, it seems more likely than not that Alibaba was coerced by the government into making that “donation.”
The Bottom Line on BABA Stock
After their recent decline on worries about the Chinese economy, Alibaba’s shares have lost nearly 30% over the last three months, 35% this year and 45% over the last 12 months.
For investors who agree with my take on the Chinese economy, I can understand how BABA stock can look attractive after its pullback. Yet, with all-powerful Beijing obviously still looking to take shots at Alibaba, I think the shares remain far too risky at this point.
I strongly recommend waiting for the Chinese government to give the e-commerce conglomerate at least six months of peace before taking a bullish position in the name. And I advise investors who already own the shares to sell them.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.