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Don’t Bet Too Heavily on Alibaba Group Holding Ltd

Josh Enomoto

Unquestionably, Alibaba Group Holding Ltd (NYSE:BABA) has been a standout performer. After a choppy start against its initial public offering, BABA stock decisively asserted itself in 2017. Shares skyrocketed nearly 94%, thanks largely to revenue growth that just wouldn’t quit.

Notably, last year was the first one for President Trump’s administration. It’s no secret that Trump is a throwback to a more nationalistic era. Thus, if the very foreign Alibaba can have its banner year during such an administration, investors understandably felt that they could see more of the same in 2018. However, the BABA stock price today left that thesis somewhat in doubt.

Against the January opener, Alibaba stock is down 3.5%. In and of itself, this metric has no consequence. It is, though, a sharp reversal from the phenomenal market profitability we’ve witnessed. Of course, the White House has much to do with the current sentiment drag.

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Last month, Trump signed an executive order imposing $60 billion worth of tariffs against China. Naturally, China retaliated, and the situation doesn’t appear to have a nearer-term solution. Along with BABA, its domestic competitors Tencent Holdings/ADR (OTCMKTS:TCEHY) and Baidu Inc (ADR) (NASDAQ:BIDU) have conspicuously softened this year.

That said, InvestorPlace’s Joseph Hargett is bullish on BABA stock. Central to his argument is a massive increase in Chinese online sales. Hargett writes: “As I’ve noted before, the domestic Chinese ecommerce market is expected to grow 50% year-over-year to more than $1.5 trillion in 2018. As the largest ecommerce retailer in the country, Alibaba will capture the lion’s shares of that growth.”

Those are massive stats, to be sure. Unsurprisingly, sentiment heading into Alibaba’s fourth-quarter earnings report is generally strong. Can anything upset this giant?

Strong Optimism for BABA Going Into Q4

On paper, it’s hard to imagine what could negatively impact Alibaba stock. The last time the company missed an earnings report was one year ago. Since Q2 2015, BABA has only missed twice. Thus, any bears must have nerves of steel to go contrarian.

For the upcoming Q4, consensus estimates peg earnings per share at $5.43. This is near the upper end of estimates, which range from $2.29 to $7.84. If BABA stock hits its target, it would represent a 25% lift against the year-ago quarter.

One thing to point out, though, is that the company has a weak history for Q4 earnings reports. While the sample size is small, its two misses have come in the final quarter. I don’t anticipate that BABA stock will make it three in a row, but it’s not out of the question.

For revenues, analysts expect $9.2 billion. This is against an estimate spectrum ranging from $8.4 billion to $9.7 billion. More importantly, should BABA hit, the result would be a 64% year-over-year growth rate. As Hargett noted, investors want to know if Alibaba can maintain its mercurial growth curve without penetrating the U.S. market.

The upcoming earnings report would go a long way in answering that question. Moreover, fundamentally, initials signs are encouraging.

With that in mind, I warn readers that with where Alibaba stock is today, shares haven’t moved since August 2017. Furthermore, that e-commerce is growing in China isn’t a surprise to the markets. If demand and enthusiasm for that demand is so strong, why hasn’t BABA moved more convincingly?

But Read Between the Lines on BABA

Unlike most other analysts, I’m not particularly confident towards China’s economic figures and projections. I understand that it’s the most populous nation on earth, and as a result, it will have phenomenal metrics. Like I said before, this isn’t a surprise to anyone, especially at this juncture.

But I also have to question the statistics’ validity. First, we have the issue that some of these incredible growth figures could be fake. Earlier this year, Bloomberg broke a story that China’s 2015 growth rate could be overstated by “a couple of percentage points.”

I don’t care how much you love BABA stock — you can’t completely separate the Chinese communist government’s dirty tricks from its flagship company.

Second, you have to consider the broader scope. China has four times our population, but it doesn’t have four times our GDP. In fact, it has about 60% of our GDP. So just do the math. Its middle class is rising in number, but not to a sustainable scale. It will take a long time before China’s definition of middle class matches our definition.

In other words, I wouldn’t bet too heavily on Alibaba stock. Its growth is impressive, but there’s a lot of holes that many aren’t acknowledging.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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