Alibaba Group Holding Ltd (NYSE:BABA) does not give me a lot of confidence as a potential investor. There are too many concerns when it comes to investing in BABA stock.
China is a difficult beast to understand, especially for Americans who have never done business over there. Being an owner of Alibaba stock does not count. Crosscurrents regarding how the government operates at different levels are simply unknown quantities, and they do factor into and affect how business is done.
It’s important to understand that the Chinese government wakes up each morning with one focus: how to feed, clothe and shelter two billion people. One of the reasons China has been cracking down on the rich and corrupt is to keep those two billion people from starting a revolution, even as it plays nice with Jack Ma, CEO of BABA.
More Problems With Alibaba Stock
Another issue is that China manipulates its currency. It sells its own currency, thus devaluing it. Although this is not happening, at the moment, as much as it used to, it remains an ever-present threat. China also has strict restrictions on individuals selling currency.
Consequently, tons of money has been fleeing China. That’s why you see Alibaba taking positions in overseas companies, and why Chinese conglomerates have been buying up luxury hotel chains and U.S. movie theater chains.
In addition, currency devaluation boosts Chinese exports by making Chinese goods cheaper to purchase. But here’s the relevance to BABA stock: It makes the yuan worth less, which means the spending power of the Chinese consumer is reduced, which means Alibaba stock takes in less revenue.
Meanwhile, President-Elect Donald Trump has threatened tariffs on Chinese imports. That means increased taxes on Chinese goods, which means higher prices for Americans, which depresses demand. That means even less possible sales to boost Alibaba stock.
So it’s a double whammy. However, Trump wants the currency devaluation to cease because it would permit the yuan to free-float, giving Chinese consumers more spending power, which is good for the global economy and demand for U.S. company products doing business in China. It would also naturally increase the prices of Chinese imports, which would make American products more competitive.
The problem with holding BABA stock is that we don’t know what’s going to happen and I don’t like uncertainty.
There are other concerns with Alibaba stock.
BABA is undergoing a Securities and Exchange Commission probe. That’s never a good thing, and even if it results in nothing, we have no assurance that will be the case. Not only that, it’s for the worst of SEC violations — accounting practices. That could totally change how much Alibaba has earned.
That ties into the culture of corruption at Chinese corporations. Money is skimmed off the top at many companies (movie theaters being a great example), and dozens of Chinese companies listed on U.S. exchanges in reverse-mergers evidenced this kind of corruption. I’m not saying this is true of Alibaba, but it’s one more reason to stay away.
Bottom Line on BABA Stock
Another little-known fact: Foreigners cannot own stock in Chinese internet companies. That’s because, per above, China doesn’t want anyone stoking dissent in the ranks of its two billion citizens.
Thus, if you think you own BABA stock, you actually don’t. You own shares of an offshore vehicle called a variable interest entity. This gives you ownership in a company that is entitled, by contract, to some of Alibaba’s profits.
That sounds fine until you realize this so-called “contract” is not enforceable in China! That takes us right back to the issue of corruption and the Chinese government basically being able to do whatever the heck it wants.
No, thanks!
I don’t even need to see financials on BABA stock. I wouldn’t touch it with a ten foot pole.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
