Alibaba (NYSE: BABA) is down 6% since Jan. 17. Much of the pressure on Alibaba stock has come in response to an outbreak of coronavirus in Wuhan. Investors are concerned about the severity of the outbreak and its potential impact on the Chinese economy.
A major outbreak of a deadly disease in China would certainly have a negative impact on Alibaba’s business. But so far, the Wuhan outbreak isn’t nearly as dangerous as all the negative headlines would suggest. In the meantime, investors have an opportunity to buy the dip in BABA, which is churning out quarter after quarter of jaw-dropping growth numbers.
Wuhan By The Numbers
As of Tuesday Jan. 28, more than 4,500 cases of coronavirus have been reported worldwide, resulting in 106 deaths (all in China), a mortality rate of 2.6%. Those numbers are definitely not something to ignore, but it’s also important to keep them in perspective. Many analysts and experts are comparing the Wuhan coronavirus outbreak to the infamous SARS outbreak in 2002 and 2003. SARS was also caused by a coronavirus that originated in China. The World Health Organization confirmed 8,098 cases and 774 deaths due to SARS during the outbreak. That’s a mortality rate of about 9.5%.
In other words, so far there have been far fewer cases of coronavirus than there were of SARS. Furthermore, this outbreak coronavirus isn’t even one-third as deadly as SARS.
“Comparisons to the SARS epidemic are imperfect but the scope is increasingly similar as cases are now >2,500 (vs. a SARS total ~8,100) with significantly increasing quarantines and travel restrictions,” Bank of America analyst Shaun Kelley says.
“Our current understanding from press reports is that the Wuhan Coronavirus appears more contagious but is not as deadly as SARS.”
History Lesson
Alibaba wasn’t publicly traded during the SARS outbreak, but looking back at how the market reacted to SARS can provide some insight into how the market will ultimately handle the Wuhan outbreak. From December 2002 to April 2003, the S&P 500 dropped 8.5%. Not surprisingly, emerging market stocks, particularly those tied to China, were hit particularly hard.
However, the important part is that in the six-month window after the outbreak ended, the market boomed, gaining 18.6%.
Tom Essaye, founder of Sevens Report Research, says investors have a clear playbook for Wuhan.
“From a market standpoint, since this disease is closely related to SARS, I think the market reaction to the SARS outbreak gives us a good template to follow,” Essaye says.
Here’s what investors should expect. Flu season in China roughly spans October through March. That’s the period in which there are the most infections, and that’s the period in which investors will be most concerned about the Wuhan outbreak. Assuming that coronavirus doesn’t mutate and become more deadly, it will probably die down by April, if investors don’t get bored with it before then.
Buy Alibaba Stock on the Dip
BABA investors can’t seem to catch a break. After more than a year of negative trade war headlines weighing down Alibaba stock, the Wuhan outbreak happened less than two weeks after a phase one trade deal was signed.
Like I said about the trade war, traders are now blindly shorting Chinese stocks like BABA as a way to play the outbreak. So far that trade has worked, and it may continue to work in the near-term. It’s the same strategy that worked during the peaks of the negative trade war rhetoric. But long-term investors should understand that Alibaba’s business is booming, growth opportunities are massive and coronavirus as we understand it today poses no threat to the Alibaba bull case.
Last quarter, Alibaba reported 39.7% revenue growth and 260.5% net income growth. Alibaba is a market leader in both e-commerce and cloud services in China, two of the highest-growth tech fields in the largest global emerging market economy. U.S. investors that can stomach the Wuhan-related volatility should look for an opportunity to buy the Alibaba dip.
If anything, the latest coronavirus headlines and subsequent sell-off have provided a buying opportunity. It has also generated a potential healthy technical pullback for Alibaba stock after a late-2019 rally to all-time highs. The Wuhan virus outbreak will eventually end. Investors that see Alibaba as more than a short-term trade on China should see the massive long-term opportunity it presents.
As of this writing, Wayne Duggan was long BABA stock.
