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The Big Questions Facing Alibaba Stock

Dana Blankenhorn

Alibaba Group’s (NASDAQ:BABA) second-quarter results fulfilled most bullish expectations of the owners of Alibaba stock.

Earnings of $1.83 per share easily beat estimates of $1.50. Sales of $16.74 billion were up 42% versus the same period a year earlier.  The company’s cloud revenue jumped  66%. year-over-year 

Alipay is Just Another Point of Contention for Alibaba Stock Investors

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For weeks. I’ve called Alibaba stock invincible, and a core holding. I called BABA stock one of the best names to own now, and said buying Alibaba Group before BABA’s earnings was investors’ best chance to maximize profit. 

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What the results from Alibaba Group and its rival, JD.Com (NASDAQ:JD) prove, is that the Chinese consumer wasn’t hunkering down last spring, anticipating trouble ahead. Instead, they were buying goods with both hands.

But what about the future?

The Storm Clouds Gather

On the surface, Alibaba Group exudes confidence about its future.

It is buying Kaola, the largest online merchant that sells imported goods to Chinese consumers, from Netease (NASDAQ:NTES) for $2 billion.  Alibaba co-founder Joseph Tsai is buying the Brooklyn Nets and their arena for $2.35 billion. 

But China faces an existential tipping point, one that Alibaba symbolizes. Alibaba Group is built on human capital, on people like Tsai thinking creatively and deeply about things like supply chains and software. But the best minds don’t just think about business and sports.

The Nets’ previous owner, Mikhail Prokhorov, also thought money would immunize him from what was happening back in his home country, Russia. It didn’t. And it won’t for Tsai,who is  reportedly worth $9.3 billion, either.

The Hong Kong Quandary

In Q2, the owners of Alibaba stock approved an 8:1 stock split in preparation for a new listing of BABA stock  in Hong Kong next month.

The Hong Kong exchange, like American exchanges, doesn’t require corporate democracy. Dual-share structures like Alibaba’s, in which the managers control a company without owning a majority stake, are not allowed on the Shanghai Exchanges. So if China decides to kill Hong Kong’s autonomy, it will also be cracking down on Alibaba’s corporate structure.

People can’t be told to think creatively about money and not be expected to think about their future. After losing most of the 20th century to anarchy, Chinese people have a strong preference for order over liberty. But all the Chinese people I know do love liberty.

Alibaba has an extensive presence in Hong Kong. It owns the South China Morning Post, Hong Kong’s leading newspaper. It wants to reach Chinese investors through Hong Kong’s exchange. But it may have to embrace free thought to accomplish that goal.

The Bottom Line on Alibaba Stock

For Alibaba stock, success covers a multitude of sins.

But today,  economic growth requires human capital. To do their best mental work, people must be free. Money has made Alibaba Group executives Jack Ma and Joe Tsai as free as any American billionaire.

But what about the people who work at Alibaba’s headquarters in Hangzhou? How much liberty will they demand, and what risk to order will their demands create?

As  long as that’s an open question, the gains of BABA stock will be limited.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.

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