It’s amazing the difference a month’s time can make. In early May, headlines shouted that insiders believed a trade deal between the U.S. and China was imminent. Today, leaders from the two nations have ratcheted up their angry rhetoric. This of course places incredible pressure on Chinese flagship company Alibaba (NYSE:BABA) and the underlying BABA stock.
Naturally, investment sentiment perfectly illustrates the ebb and flow within the political realm. The first three trading sessions last month started with relatively strong upside movements. But once angry social-media posts proliferated from the White House, the Alibaba stock price tanked. Since May 1, shares have dropped nearly 21% while the 403-stock iShares MSCI China ETF (NASDAQ:MCHI) is down 12.4%; BABA stock is the exchange-traded fund’s second-biggest holding.
Those looking for a respite in Alibaba stock shouldn’t hold their breath. Throughout the first round of the U.S.-China trade war, Beijing adopted a comparatively measured approach. They were content in letting, to paraphrase Confucius, a fool open his mouth and remove all doubts (about his foolishness).
But now, the second-biggest economy in the world has apparently lost its patience. Just recently, Beijing launched an attack on the Trump administration, calling out American “intimidation and coercion.” Such nasty vitriol does nothing for the longer-term prospects of the BABA stock price.
Yet Alibaba seems to have a workaround. Last year, the Chinese tech giant introduced its strategy to court high-level international brands to its home import market. A synergistic component of this strategy is to sell cloud services to international firms seeking a foothold in China.
This vision had the potential to take Alibaba stock to the next phase of its growth cycle. But with the trade war showing no signs of abating, investors should dismiss this narrative.
Alibaba’s Cloud Turned into a Paper Tiger
As comparatively new entrants on the elite global stage, a subtle desperation underlines virtually all major Chinese companies. The firms are both eager and anxious to prove to the western investing establishment that they belong.
As such, companies like Alibaba, Tencent (OTCMKTS:TCEHY) and JD.com (NASDAQ:JD) have a vested interest in putting their best foot forward. Regarding Alibaba, they’re proud about their global market share in the cloud, taking around 5%.
But relative to the competition, that’s a small tally. Amazon (NASDAQ:AMZN) is the decisive leader at 35% and Microsoft (NASDAQ:MSFT) comes in second at 15% share. With China levering a population size four times that of the U.S., Alibaba is doing less with more.
Adding to deeper questions about BABA stock is the company’s list of cloud customers. Yes, they have some big-time names like Ford Motor (NYSE:F). But that’s only because Ford is desperate to break into the Chinese market. Without China, the car maker is toast. Thus, management figures going with a Chinese cloud platform is the most-effective means to secure Chinese customers.
But most companies aren’t clinging to life support the way Ford is. Those firms have no need for Alibaba’s services because they can get better support from Amazon or Microsoft. Plus, if a major organization doesn’t want those two platforms, they have better options, such as Alphabet (NASDAQ:GOOGL) or IBM (NYSE:IBM).
Finally, the trade war complicates Alibaba stock because it negatively impacts the underlying company’s cloud ambitions. Contrary to common opinion, leading in the cloud involves more than just building a massive data center. Software and infrastructural compatibility between provider and client is critical.
Worsening relations between the U.S. and China also cuts business and technological ties. This makes compatibility a possibly insurmountable challenge, hurting the case for BABA stock.
BABA Stock has Few Options Available
Love him or hate him, President Trump tells it like it is. Okay, maybe he tells it like he thinks it is. But when it comes to the issues leading up to this trade war, Trump dropped some truth bombs.
An alarming CNBC poll revealed that 20% of corporations have had their intellectual property (IP) stolen by the Chinese. That’s a major concern because IP represents the majority of the value of S&P 500 index companies.
So while Americans are going back and forth about Trump’s policies, the rest of the world sees things differently. They don’t want to suffer the same consequences that U.S. blue chips have. Therefore, I anticipate reluctance in trusting Chinese services, which in turn hurts Alibaba stock.
China must get over this key credibility problem. The Trump administration is making it difficult to do so, constantly peppering it with embarrassing exposes. A big reason why the Chinese are reacting angrily is because the insults and accusations feature a ring of truth.
This geopolitical headwind places Alibaba in an awkward situation. As I stated previously, the company is China’s flagship. But with the flag under duress, I’d be cautious on BABA stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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