Ignore Trade-War Noise and Stick With Alibaba Stock for the Long Haul
In mid-June, Alibaba (NYSE:BABA) was making new all-time highs above $210 as investors were focused on the company’s hyper-growth prospects through the booming Southeast Asian consumer markets.
But then escalating trade tensions stung the stock. Investors stopped focusing on big growth in under-penetrated Southeast Asia. Instead, they focused on what tariffs could mean for BABA stock.
As a result, BABA stock dropped. In a big way. Entering July, BABA stock was trading right around $185.
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Make no mistake about it. This dip is a buying opportunity.
In the big picture, the presently troubled trade situation is just a blip on the radar. It creates near-term headline risk and that’s about it. Tariffs aren’t permanent. Nor are strained trade relations between the U.S. and China.
Alibaba, however, is permanent. And so is the company’s long-term growth narrative, which is as long as it is robust.
Altogether, then, investors should follow one simple rule: Ignore the trade noise and stick with BABA stock for the long haul.
Here’s a deeper look.
Near-Term Trade Risks Are Overstated
When it comes to BABA stock, investors aren’t worried that tariffs will directly impact Alibaba’s business. After all, a majority of the company’s retail sales happen domestically and are therefore not directly impacted by tariffs.
Instead, the big concern with BABA stock on the trade front is that escalating trade tensions between the U.S. and China will cause the booming China economy to slow. Because BABA stock has long been viewed as pure play on the booming China economy, a cooldown could result not only in weaker numbers for Alibaba, but also substantial weakness in BABA stock.
That is why BABA stock has dropped from $210 to $185 in a hurry.
But, such China economic slowdown risks are overstated.
China just reported second quarter GDP growth of 6.7%. That matched expectations and is only slightly lower than the first quarter’s 6.8% growth rate. It is also in line with the 6.7% to 6.9% GDP growth China has reported over the past several years.
Granted, second quarter numbers don’t fully reflect the present trade situation. That will show up more potently in the back-half of the year. But, the second quarter numbers did have some of the trade tensions in there. And it didn’t cause much damage at all.
At its core, it is unlikely that trade-war risks linger on for much longer and cause any lasting damage to the Chinese economy. The truth is that the U.S. needs China, and China needs the U.S.
The two global powerhouses are heavily dependent on one another. Thus, it is likely that after a few months of tariff threats going back and forth, a resolution is reached because a resolution is in the best interest of both countries.
Long-Term Growth Potential Is Undervalued
While near-term risks to BABA stock are overstated, the long-term growth potential is being undervalued by the market.
This is a company which grew revenues by over 60% last year. That 60% growth lapped 60% growth in the year-ago quarter, and nearly 40% growth in the two-years-ago quarter.
In other words, this is a big growth story with big growth rates that have been here for a long time. The reality is that these big growth rates will be here for a lot longer, too.
China annual household expenditures per capita are roughly $3,600. That is less than 20% of America’s annual household expenditures per capita, which are nearly $23,000.
Consequently, if China’s consumer class continues to urbanize, digitize and look more and more like the American consumer class, then the pathway for big growth ahead in Alibaba’s e-retail business remains long and promising.
And that is just the e-retail business.
Alibaba is also China’s leader in the cloud. Cloud computing revenues more than doubled year-over-year last quarter, while lapping against 100%-plus growth in the year-ago quarter and 175% growth in the two-years-ago quarter.
This business promises to have big growth for the foreseeable future, regardless of how trade tensions play out, due to secular growth in global demand for cloud infrastructure services.
Despite all this big growth potential, BABA stock trades at under 30 times forward earnings. That is anemic next to 60%-plus revenue growth.
Bottom Line on BABA Stock
When it comes to BABA stock, ignore the trade-war noise and focus on the big picture. The big picture is that Alibaba is a big growth company with huge growth narratives through China’s booming consumer market and the global secular growth cloud market.
This big picture is being undervalued by the market. Thus, current trade risks are creating a buying opportunity for long-term investors.
As of this writing, Luke Lango was long BABA.
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