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Listing in Hong Kong Could Help Alibaba, But It May Not Help BABA Stock

Will Healy

Alibaba (NYSE:BABA) will soon benefit from a new source of funding. The company has made plans to launch an IPO on the Stock Exchange of Hong Kong. According to estimates, this moves could raise about $20 billion for Alibaba. Although the IPO should benefit the company, it  will probably not translate into gains by BABA stock.

BABA Stock Will Also Be Listed in Hong Kong

"Counterfeit" lawsuit just noise for BABA stock

Source: Shutterstock

Four years ago, BABA rejected a Hong Kong listing and instead decided to list BABA stock on the New York Stock Exchange. Refusing to list in Hong Kong more than four years ago may have hurt BABA. As InvestorPlace columnist  Vince Martin pointed out, BABA stock has failed to meet performance expectations. While the 68% gain of BABA stock since it was listed  in New York might constitute a decent return, it falls short of the gains of Amazon (NASDAQ:AMZN) stock Moreover, Tencent (OTC:TCEHY), which remains an OTC stock, has generated a 175% return over the same period. BABA  hopes that going into Hong Kong could close some of the gap between Alibaba stock and its peers.

BABA Stock Continues to Be Hurt by the Trade War

However, outside forces could continue to weight on BABA stock. Despite the upcoming IPO of BABA stock, the U.S.-China trade war continues to hang over Alibaba stock. Alibaba does not conduct a lot of business in the U.S. Still, the trade war affects the purchasing power of Chinese consumers, so Alibaba still feels its impact.

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Consequently, Alibaba stock fell after reporting its first-quarter results despite beating on both earnings and revenue. Even though its earnings per share came in 33 cents ahead of analysts’ consensus  estimate, BABA stock price has continued its slide, now falling to $150 per share.

But the trade war does not change the fact that BABA has become the most successful retailer in China.

BABA has also taken a page from the playbook of Amazon and made itself into a cloud-computing company. However, unlike Amazon, which earns most of its profit from the cloud, Alibaba’s cloud business has not yet turned a profit.

That does not worry me, as I believe BABA’s cloud business will become profitable. Moreover, the trade war should end eventually. At that point, China can resume the growth that has fueled BABA stock in previous years.

The Leadership Transition Is Dangerous

BABA’s  cloud business makes it a conglomerate. As I stated in an earlier article, as a result, investors need to also worry about the looming, imminent departure of its  CEO, Jack Ma. Alibaba is the “house that Jack built,” referring to Ma, who is also  the company’s founder. While Daniel Zhang may become a worthy successor, the history of leadership transitions for conglomerates has been a poor one.

The most striking example in American business is another “house that Jack built,” in this case, I’m referring to Jack Welch, the former  GE (NYSE:GE). CEO. Welch transformed GE into what became the world’s largest company by tying several unrelated businesses into one entity. The problem is that conglomerates often become businesses that leaders cannot hand off.

That has been the case at GE. While GE thrived under Welch, it floundered under his successor, Jeff Immelt. Though GE may finally begin to recover under its current leadership, one cannot ignore the fact that GE stock has lost almost 75% of its value on an adjusted basis since 2000.

This does not mean that Alibaba will suffer as much as GE. Zhang could even take BABA stock price to new records. However, given the history of conglomerates, I would wait to see how the company performs under Zhang before buying either New York or Hong Kong-listed shares of BABA stock.

The Bottom Line on BABA Stock

While the listing of BABA stock in Hong Kong might benefit Alibaba as a company, the performance of BABA stock remains another matter. Moreover, Alibaba remains a conglomerate that’s undergoing a leadership change. Stocks often suffer for years after such transitions. Consequently, before buying BABA stock,  investors might want to wait to see if the house that Jack built can succeed when somebody besides Jack runs it.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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