Should you buy into the recent rally in Alibaba (NYSE:BABA)? This whole situation for Alibaba stock and its investors reminds me of lyrics from the late Tom Petty, “The waiting is the hardest part.” After all, alongside all of the recent drama surrounding the coronavirus from China, the company is scheduled to report third-quarter 2020 earnings on Feb. 13.
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As 2019 drew to a close, 2020 looked to be a great year for Chinese stocks. The phase one trade deal with the United States brought a much needed cooling of rhetoric, if not actual tariffs. Then, right before the new year, we started to hear about the coronavirus.
As the coronavirus dominated the news cycle in January, Alibaba was not immune to the selloff in Chinese stocks. However, the stock has rallied recently. And analysts seem confident that the company will post solid earnings. Alibaba can only hope they’re right. Because, right now, Alibaba needs a positive earnings report to change the coronavirus narrative.
Alibaba Has a Case of the ‘Yeah But’s’
For Alibaba stock, the current narrative goes something like this. “There’s no reason to believe the coronavirus will affect the stock long term. But what affect will the coronavirus have on the Chinese economy in the short term?”
InvestorPlace.com Web Editor Robert Waldo echoed this very sentiment in a recent article about Alibaba.
“One thing is certain, however. It’s too soon to determine how significant the impact of this virus will be on Alibaba stock and the Chinese/global economy. In the very long term, I think everything will turn out well for the company. More importantly, I think everything will turn out well for the world … at least when it comes to the virus.”
Echoing this sentiment, InvestorPlace.com contributor Josh Enomoto also advised investors to proceed with caution:“the idea that the coronavirus is much worse than reported is not a conspiracy theory. As such, the bad news may not be fully baked into the Alibaba stock price.”
Clearly, the company is facing some serious questions ahead of its earnings report on Thursday.
China May Have More to Fear Than Fear Itself
The overall consensus of medical professionals is not to panic. History serves as a useful guide. And the world has made remarkable strides to quickly develop vaccines. For example, Johnson & Johnson (NYSE:JNJ) recently announced that it is on the front line of developing a vaccine for the coronavirus.
Globally, I think cautious optimism is a fair assessment. I’ve parented children through the petri dish of elementary school. I’m not taking any more, or less, precautions than in years past.
However, in China, stories like this one, which broke Feb. 6, continue to manifest.
The Chinese doctor, Dr. Li Wenliang who first announced the presence of the virus (and was subsequently accused of rumor-mongering by the Wuhan police) has died. Dr. Wenliang contracted the virus on Jan. 12 from one of the patients he was treating. He was only confirmed to have the new virus on Feb. 1.
Furthermore, CBS News reports that according to the World Health Organization (WHO), the virus continues to spread throughout China despite the quarantines and other population control methods that the country has undertaken. As of this writing, the number of cases worldwide exceeds at 28,200. Over 28,000 of those cases are in China. Of the 565 deaths from the disease all but two have been in China.
What Does This Mean For BABA Stock?
Alibaba stock dropped to around $205 after the first reports of the virus broke out. Since then, it has rallied and turned positive for the year to date. That leaves investors with a choice. If you believe that the worst of the coronavirus was already been priced into the stock when it hit $205, then this may be the time to jump in. However, if there continues to be conflicting if not outright bad news about the coronavirus, then the stock may find itself range bound until things shake out.
I will side with my InvestorPlace colleagues and bet that investors have a short memory. Over the long arc of history, Alibaba is a good stock and will most likely be a great investment. But is this a dip you should buy on? I’m skeptical, but I tend to avoid stocks with a hefty risk premium. And I especially avoid stocks when I have no practical way of calculating that risk premium.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
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