Alibaba Group Holding Ltd (NYSE:BABA) suffered a major setback in its efforts to make a play for the US market. The company’s payments business, called Ant Financial Services Group (which is privately held), was blocked from acquiring Moneygram International Inc (NASDAQ:MGI). Yet, Wall Street took the news in stride, as Alibaba stock ended the day unchanged.
The reason for the failed deal: The US government ruled that the combination was a threat to the national interest.
And, yes, this should really not be too surprising. The Trump Administration has an “America First” policy, which involves protecting domestic business interests. What’s more, there continues to be a hardline approach to China.
So, what could this mean for Alibaba stock? Should investors worry?
Well, first of all, it is interesting to note that BABA has had an inauspicious track record with dealmaking in the US. A few years ago the company launched its ecommerce platform, but it did not catch on. Then there was an initiative to gin up demand from US businesses to sell into China. But this effort has fallen short as well.
Now, this does not mean that BABA will not ultimately build a thriving business in the US. Let’s face it, the company has tremendous resources and a rock-solid infrastructure. However, the strategy will likely not involve transformative M&A transactions because of the political environment. Rather, BABA must rely on direct investments, which will likely take more time.
Is the Chinese Market Enough for Alibaba Stock?
Even though the US market is lucrative and massive, it is not a must-have for BABA stock. The good news is that the growth opportunities in China remain enormous. Just consider some of the following data points:
- The middle class in China is expected to reach 600 million by 2020. By comparison, the population of the US is about 320 million.
- China has the largest retail market, at close to $4.9 trillion.
- The ecommerce segment in the country is projected to jump from $470 billion in 2017 to $839.54 billion by 2021.
BABA has been the company that has benefited most from these trends. During the latest quarter, the company posted revenue growth of 61% to $8.3 billion. There are currently 488 million active consumers on the digital platform, up by 22 million during the past year.
BABA has leveraged its base into other markets as well. There is the cloud segment, which saw revenues spike by 99% to $447 million in the most recent quarter. BABA also has an entertainment division, which has been powered by its Youku video system.
Bottom Line on Alibaba Stock
The Chinese market is certainly getting more competitive. Note that JD.Com Inc(ADR)(NASDAQ:JD) and Tencent Holdings Ltd (OTCMKTS:TCEHY) have been working closely together to bolster their ecommerce efforts.
But the Chinese market is tough for foreign operators to move into. So the incumbents should have some protections. Besides, the China opportunity is big enough for several large players.
OK, but what about the Alibaba stock price? It’s had a strong run, up 109% during the past 12 months, but the valuation is still not out of line, with the forward price-to-earnings multiple presently at 27.
This is fairly reasonable given the strong growth rate and robust profitability.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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