As Alibaba (NYSE:BABA) stock continues to move downward it poses a greater and greater conundrum. That is, the upside potential is getting bigger and bigger.
But with the most recent scare to the markets from China Evergrande Group (OTCMKTS:EGRNF) investors are wondering if another Lehman Brothers event is forthcoming.
Yes, Alibaba continues to be a strong company. But it has been held down due to little fault of its own throughout 2021. If investors were cautious before, they’re scared now. Could the China Evergrande Group crisis be the straw that sends unprecedented shockwaves through China, breaking Alibaba’s back?
And does the risk it poses to China’s financial system finally provide enough reason for the most bullish BABA stock investors to say enough is enough? No, not according to at least one source it doesn’t.
Evergrande Isn’t Lehman Brothers
That’s the conclusion investors should come to according to a recent Barron’s article.
The first few sentences of that article make the author’s position clear: “The financial turmoil of giant Chinese property company China Evergrande Group is not the Asian analog to the collapse of Lehman Brothers, which set off the financial crisis 13 years ago this month. That’s because Beijing is likely to prevent any contagion from infecting its financial system to maintain the social and political stability that is its No. 1 priority.”
Some investors and pundits are so fervently anti-China that they might like to see such a meltdown transpire. I am not one of them, I simply hope that the pace of recent crises slows rather than increases. In my opinion, there’s enough turmoil in the world currently. Thus, I too hope the Lehman Brothers Evergrande analogy is not apt as well.
And if the author is right and China will be able to control the Evergrande crisis, Alibaba should remain attractive.
That’s the current investment environment which exists in China. It does appear disconnected at times. Nevertheless, a series of unrelenting shockwaves are rippling through its economy.
But Alibaba is still the same strong company it has been. Investors cannot forget that. And investors are keen to take advantage of the opportunity.
Investors considering a purchase of BABA stock may have been scared away by the Evergrande threat.
But that is only increasing the upside inherent in Alibaba shares. The company has been hit time after time over the past year. The now infamous ANT IPO failure and subsequent $2.8 billion fine have only served to increase skepticism. That has attracted market bulls. And China has hatdly stopped there. There have been subsequent crackdowns that seem never ending.
But even with all of these issues Wall Street thinks BABA shares have been unfairly punished. The average analyst target price sits at the Chinese Yuan equivalent of $251. Shares trade $146.
My colleague Chris Lau feels the same way about the risk/reward inherent in Alibaba right now: “The more Alibaba shares fall, the bigger the upside. Shareholders also lose more on paper when this happens. Analysts have an upside price target ranging from $190 to $336, according to data collected by TipRanks. At an average price target of $265, readers must scrutinize the over 80% upside potential.Analysts are unwilling to reiterate anything other than a “buy.” Too many mutual funds hold Alibaba stock.”
What to Do
I remain a big fan of Alibaba. The company has proven again and again that it has growth in store quarter after quarter. Just about everyone covering it characterizes its troubles as external. The company continues to grow. It hit $31.83 billion in revenues recently, a 34% increase year-over-year.
That was slightly less than anticipated. But chalk it up to external forces. In a few quarter’s time prices could be much, much higher than they currently are.
On the date of publication, Alex Sirois 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.