Alibaba Group Holding Ltd (NYSE:BABA) stock is already up 33% year-to-date, enabling it to more than gain back the ground it lost last year.
In 2018, BABA stock fell 20% amid concern over Alibaba’s profit margin and the impact of the trade war on China’s economy. The decline of Alibaba stock came as Chinese stocks experienced their worst year in a decade, and at one point, Alibaba was the world’s most shorted stock.
Alibaba announced its earnings on Jan. 30. Its revenue grew 41% year-over-year. However, that was Alibaba’s slowest top-line growth in three years. Meanwhile, the conglomerate’s net income rose 37% to $4.92 billion.
Alibaba has been busy over the past week, announcing several deals.
On Feb. 14, Alibaba’s Ant Financial announced that it would purchase WorldFirst, a British fintech startup that specializes in international money transfers. That same day, Alibaba invested in Bilibili Inc (NASDAQ:BILI), a video-streaming site which specializes in anime, comics and video games.
And on Feb. 18, BABA announced that it had increased its stake in China International Capital Corp, one of China’s biggest investment banks.
Reuters also reported on Feb. 14 that Alibaba was talking to the German retailer METRO AG (OTCMKTS:MTGGY) about investing in Metro’s China subsidiary.
Is BABA stock a buy?
BABA Stock Pro: International Expansion
BABA is expanding overseas. The company has ambitious goals; last year, Alibaba set a goal of serving 2 billion customers by 2036.
Alibaba wants to replicate the success it’s had in China in India and Southeast Asia. If BABA successfully expands into new markets,Alibaba stock would be boosted.
Alibaba owns a large share of Paytm, which is trying to be the Alibaba of India. Paytm is India’s top mobile wallet, with 95 million monthly active users. By 2022, Paytm hopes to have 500 million users.
Alibaba also owns Lazada, one of the biggest e-commerce sites in Southeast Asia. Lazada brought Alibaba’s Singles Day shopping festival to the region in 2017.
BABA Stock Pro: Relisting on a Chinese Exchange
BABA stock could benefit if the company decides to list its shares on a Chinese stock exchange.
The Chinese government would like to see homegrown tech giants like Alibaba return home; last year it released regulations which could ease the process.
“The migration to China could bring a valuation boost to US-listed Chinese tech stocks,” Saxo Bank wrote last year.
And Citron Research called a potential listing in China “a major positive catalyst for Alibaba’s ADR stock.”
BABA Stock Pro: Hot Technologies
Investors who buy Alibaba stock get a stake in the technologies of the future. These technologies include artificial intelligence (AI) and blockchain, the technology behind bitcoin.
Moreover, BABA has invested in some of the world’s top AI startups, including Megvii and SenseTime, which are working on facial recognition technology. Alibaba is using this technology to facilitate payments and to prevent ticket scalping.
Furthermore, Alibaba is also working on building its own AI chips which will power self-driving cars.
Last year, iPR Daily reported that Alibaba was the world leader in blockchain patents. Alibaba launched a blockchain-based money transfer service last year, and companies can run their own blockchain-based apps on the Alibaba Cloud.
BABA Stock Con: China’s Economy
Although Alibaba is expanding overseas, China still accounts for most of its revenue.
As a result, Alibaba stock is vulnerable to the swings of the Chinese economy. I discussed the potential problems of China’s economy, including its debt buildup since 2009, in a 2016 article.
To boost China’s economy, the nation has to take on more debt, but its debt levels are already high. It’s a difficult balancing act.
It looks like China is taking steps to boost its economy. That will help in the short-term, but it increases the risk of a debt crisis in the future.
Of course, a Chinese debt crisis would hurt BABA stock.
BABA Stock Con: Regulatory Risks
Last year, Alibaba’s Alipay was hit by regulatory changes in China which impacted its ability to generate revenue by making loans. More such changes could be on the way; in November the Chinese central bank announced that it was testing new regulations on Ant Financial.
And in December, the SEC and the Public Company Accounting Oversight Board (PCAOB) put out a statement reminding us that they face difficulties with inspecting China-based auditing firms.
“Alibaba’s auditor, PwC Hong Kong, has never been inspected by the PCAOB,” MarketWatch added.
BABA Stock Con: VIE Structure
As I’ve mentioned in previous articles, Alibaba’s unusual corporate structure poses risks for investors.
When you buy Alibaba stock, you are actually purchasing shares in a complex legal structure called a variable interest entity. This structure is necessary since China restricts foreign investment in the technology sector.
BABA notes some of the risks involved posed by this arrangement in its annual report:
“If the PRC (Chinese) government deems that the contractual arrangements in relation to our variable interest entities do not comply with PRC governmental restrictions on foreign investment…we could be subject to penalties, or be forced to relinquish our interests in those operations,” BABA warned.
Such a decision by Beijing could negatively impact Alibaba stock .
The Verdict on BABA Stock
I do think Alibaba has a promising business, but I also believe that investing in Alibaba stock involves some risks that aren’t faced by Microsoft Corporation (NASDAQ:MSFT) or Amazon.com, Inc. (NASDAQ:AMZN) investors.
I discussed my concerns about Alibaba in greater detail in a 2017 article.
Instead of buying Alibaba stock, I would go with tech stocks like Microsoft and IBM (NYSE:IBM). These companies are also working on technologies such as blockchain, artificial intelligence and quantum computing.
Microsoft brings with it a relatively diversified revenue stream, while IBM stock has held up well during bear markets.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.