Don’t Let the Recent Bump in Alibaba Stock Fool You

Stocks to sell

As I’ve written before, Alibaba (NYSE:BABA) is one of the more interesting stocks in the market. To bulls, the story is almost self-evident. BABA stock offers exposure to the enormous and still fast-growing Chinese market. And even with a 34% rally year-to-date, Alibaba stock isn’t particularly expensive.

Alibaba stock BABA stock

To bears, the risks are equally obvious. BABA shares don’t include actual ownership of the company. As I noted earlier this year, the VIE (variable interest entity) structure may be against Chinese law.

While China’s population is huge and Alibaba’s growth impressive, the company still operates in a nominally Communist country under a single-party government. Add in long-running accounting questions and for some investors, Alibaba stock is a firm “avoid.”

I’ve generally leaned toward the skeptical side when it comes to Alibaba stock, for instance calling a top in BABA back in early December. That call was prescient in the near term, but since then Alibaba stock has reclaimed those levels and then some. After reaching a six-month high last week, however, the near-term outlook again looks questionable.

The risks here clearly are rising which could lead BABA to again turn downward.

A New CEO

On this site last month, Will Healy made an interesting point about the CEO change at Alibaba. Founder and long-time CEO Jack Ma is leaving in September. And as Healy pointed out, conglomerates like Alibaba tend to struggle after management changes.

Healy pointed to General Electric (NYSE:GE) since the departure of Jack Welch. And while, in retrospect, some of GE’s current problems likely can be traced back to Welch’s decisions (notably the mess at GE Capital), it’s an interesting analogy.

Alibaba truly is a conglomerate at this point, as it expands into cloud computing, entertainment, and other areas. New CEO Daniel Zhang will have quite a few proverbial balls in the air when he takes over. Zhang will have to be up to the task.

Competition Grows

One of Zhang’s immediate challenges will be maintaining Alibaba’s leading market share. Competition in the legacy business remains intense, with second-place JD.com (NASDAQ:JD) investing heavily in a bid to drive sales higher.

So far, Alibaba is holding up just fine. Revenue in its “core commerce” category rose 40% in the fiscal third quarter (ending December), against a 22% rise for JD.com. The company incredibly had 636 million active customers on its platform in calendar 2018 – a figure roughly double the entire population of the United States.

The question, particularly as BABA stock rallies, is whether that’s enough. I’ve long argued that international expansion is a key part of the long-term growth story here. Outside China, Alibaba will face rivals like Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG,GOOGL).

Alibaba has made a modest move into the U.S., announcing a partnership with Office Depot (NASDAQ:ODP) this week. Southeast Asia is a clear focus as well. But with still less than 10% of revenue coming from outside China, Alibaba will need more wins in more markets.

China’s Macro Picture

Chinese stocks on the whole remain below 2018 highs, in large part due to continuing worries about the health of the Chinese economy. Wayne Duggan dismissed those concerns, pointing out that the disappointing 6.6% growth in China’s 2018 GDP is more than double that of the supposedly strong U.S. economy.

The worry here isn’t slowing growth, however. It’s that the millions of empty apartments and the government’s picking of winners and losers (including Alibaba) at some point will lead to a decline, if not a collapse, in the broader economy.

Again, different investors can view the Chinese economy very differently. But with 90%+ of its sales coming domestically, the fate of Alibaba stock obviously is tied to that of the broader economy. Even modestly rising fears of a slowdown could cause investors to flee. That’s what happened to Chinese stocks on the whole last year and I wouldn’t be surprised to see a similar sell-off in 2019.

The Stock Market and Alibaba Stock

As 2018 trading shows, BABA stock also is tied to the performance of stocks on the whole. And there are some signs that investors’ risk appetite is declining.

Housing stocks have pulled back in recent sessions. Higher-debt stocks are struggling. The small-cap-heavy Russell 2000,which was the canary in the coal mine ahead of last year’s broad market rout, dropped over 4% in the last five sessions.

BABA stock hasn’t been immune. It’s pulled back in recent sessions as well, including a 3.8% decline on Thursday. Given the clear amount of risks here, Alibaba stock won’t be a safe haven if the market struggles. If markets keep dropping, BABA likely will too.

As of this writing, Vince Martin has no positions in any securities mentioned.

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