Long-time readers should know that I’m very skeptical of Alibaba (NYSE:BABA). It’s unlikely that I’ll ever invest in Alibaba stock. There would have to be a massive simplification of their accounting, much more clarity on their revenue recognition practices, and the adoption of an independent board of executives before I could ever get comfortable with the Alibaba story.
But for today, let’s take a look at the bright side. If you do believe in Alibaba’s story, where’s the ceiling? How high could BABA stock go once the trade war winds down and investors start buying Chinese equities again?
I make the case that BABA stock could hit $200 again fairly soon. Here’s why.
Alibaba’s Faster Revenue Growth
One big point in Alibaba’s favor recently is that they have maintained their growth rate despite the big slowdown in the Chinese economy. Most Chinese firms have shown a sharp drop-off in their business performance in recent months. Additionally, key retail sales figures in China, such as auto demand, have plummeted.
Importantly, Alibaba’s closest rival, JD.com (NASDAQ:JD) has seen its revenue growth rate dive from 50% annually into the twenties recently. Meanwhile, Alibaba has managed to keep its revenue growth rate up at 50% per year. That’s only a slight slowdown from where it was during better times. That’s particularly impressive given that Alibaba is growing off a huge revenue base already.
Now, the more skeptical among us might counter that it is difficult to believe Alibaba is growing revenues at 50%/year in China’s dour economic climate. It gives more fuel for the swirling rumors around Alibaba’s revenue recognition practices. But again, if you believe Alibaba is credible, then its performance during this economic downturn has been outstanding.
If the numbers are real, it speaks to Alibaba’s great diversification. With so many other businesses besides its core retail, perhaps that has allowed it shelter from the economic storm while rivals like JD have slumped.
Alibaba Stock and Market Access
Another strong point for Alibaba is that it has absolutely incredible access to the average Chinese consumer. Alibaba claims that 654 million Chinese people visited its various retail websites last year. That figure grew by 18 million last year. That’s not a huge increase, but when you already reach more than half of the adults in a country, even modest growth is impressive. Furthermore, its monthly average users on mobile devices increased as well and topped 700 million.
Interestingly, Alibaba may be able to turn a negative into a positive due to the trade war. The longer normal supply chains remain broken down due to trade war friction, the stronger Alibaba’s position grows. That’s because it has by far the most customers and best distribution in China.
This makes it more desirable for America and other exporters to route their business through Alibaba given the uncertain political situation. By contrast, this would hurt smaller rivals like JD that have been building import businesses with specific overseas manufacturers that may lose interest given the trade war barrier.
Trade War and Alibaba Stock
China’s official GDP growth figure came in at 6.2% last quarter. That’s its worst readout since 1992 when the Chinese government began publishing regular GDP data. And many outside analysts suspect that the government is overstating even that slowing GDP growth number.
China and the U.S. reached a truce on some tariffs earlier this summer, but a large number of tariffs remain in place. Trump has promised to put even more into effect if China and the U.S. don’t reach a deal soon. Many analysts, myself included, expected the U.S. and China to reach a deal by now.
But we must accept the possibility that this will drag out until next year’s American election. Trump certainly seems unwilling to back down on the issue for the time being. And China may be playing to run out the clock, hoping Trump’s opponent wins next November.
If the trade war drags on, it would be a negative for the Alibaba stock price. But it’d be worse for most of Alibaba’s U.S.-listed Chinese internet rivals. This makes BABA stock a relatively safe holding for investors fearing an extended trade slowdown.
Alibaba Stock Verdict
If you believe Alibaba’s accounting is credible and that the Chinese economy will pick back up soon, then you may find BABA stock interesting at this price. It certainly stands out from most of the rest of the tech world. Alibaba stock is down over the past 12 months while the NASDAQ has made new all-time highs. I wouldn’t be surprised if BABA stock caught back up with its overseas tech rivals.
BABA stock is also nicely positioned for the trade war worries. It’s one of the less affected Chinese companies from the situation. If the trade war continues through the presidential election, it would hurt BABA stock less than most other Chinese firms.
Regardless, when the two countries finally do reach a deal, BABA stock is going to soar regardless. While I have grave doubts about Alibaba’s long-term merits, an attractive short-term trade could be setting up here.
At the time of this writing, Ian Bezek owned JD stock. You can reach him on Twitter at @irbezek.