The superficial logic holds water. Although not facing a direct threat, the ongoing U.S.-China trade war still imposes concerns against Alibaba Group (NYSE:BABA) Naturally, this dynamic threatens Alibaba stock.
Moreover, Alibaba’s flagship property Tmall has capitalized on the rise of China’s consumerism. But if those consumers are losing jobs and eroding incomes, the economic tensions would hit BABA stock in the jugular.
But here’s a wrinkle to that thesis: thus far, little empirical evidence exists that Alibaba has suffered under the tariff shootout.
Nevertheless, nervous investors have shaved more than 20% off the BABA stock price since June of last year. That’s the case even with this month’s rebound effort. Fear, no matter how unmerited, remains a powerful force.
But this irrational apprehension won’t last indefinitely. Eventually, investors will realize that problems haven’t weighed down Alibaba stock; at least, not in the manner that experts suggested.
Indeed, China may be inching its way to the trade negotiation table. That development only bolsters the bullish case for Alibaba stock here in the aftermath of its post-earnings tumble.
Many Remain Bullish on BABA Stock Despite Noise
It wasn’t difficult to cast a shadow of doubt on the most-recent results from the so-called Amazon (NASDAQ:AMZN) of China. While last quarter’s top line was up 51% year-over-year, the 11% slide in operating income was worrisome. To many analysts, this confirmed that trade turbulence spelled out certain doom.
Alibaba stock tried to rally on the news, but the sellers were able to rekindle weakness.
However, not all experts (or amateurs, for that matter) are convinced the trade war is as bad as advertised.
SunTrust’s analysts remain among those supporters, citing dominance in China’s e-commerce market and the country’s burgeoning middle class. Additionally, the company has multiple strategic investments that reaffirm confidence in the long-term picture for the BABA stock price.
Baird analyst Colin Sebastian agrees. He further dives into the latter argument, noting viable synergies. One of those synergies is Alipay, an online payments company that now exceeds PayPal (NASDAQ:PYPL) in size. Further, Alipay has a cloud-computing platform called Aliyun which could drive incremental growth.
Most important, Sebastian maintains a “buy” rating on Alibaba stock.
Arguably the hardest-hitting bullish case for Alibaba stock right now, however, comes from Loop Capital analyst Rob Sanderson.
Sanderson initiated Loop’s coverage with a “buy” rating, explaining it was the firm’s “best play” on China’s shift toward a consumer-driven economy. More than that though, he noted Alibaba’s target market provides insulation from macro issues. These include slowing exports or trade wars. Better yet, they’re well positioned to serve China’s ravenous consumption.
But Alibaba’s slowing growth? It’s mostly due to the law of large numbers. Next year’s expected 35% improvement in revenue and subsequent 24% increase in per-share earnings is still amazingly impressive, and prices BABA stock at only 24.6-times forward-looking earnings.
Looking Ahead for Alibaba Stock
Still, undervalued or not, you cannot ignore mass-scale human psychology. The trade war legitimizes fears, which invariably keeps a lid on the BABA stock price.
That may be about to change as well, however.
The data is admittedly inconsistent, but on balance, the tit-for-tat tariffs seem to be having little impact on trade. While China’s trade surplus was down nearly 13% during the first four months of the year, May’s surplus was roughly twice what had been projected to China’s favor.
Chinese consumers now appear to be buying fewer American-made goods, but the opposite isn’t necessarily true.
It could indicate waning demand, though it may also simply be the impact of an ever-weakening Chinese yuan, which just hit its lowest value of the year. Or, the yuan could be this weak because China’s economy is starting to crumble thanks to the war of tariffs.
Regardless of the interpretation, what’s left is shares of a company that isn’t doing nearly as poorly as it’s supposed to be doing. Moreover, a key overhang for Alibaba stock may fade.
Whispers are now starting to circulate that China’s President Xi Jinping is willing to enter serious negotiations of trade policies between the two economic giants. Such a meeting could take place at the G20 Summit scheduled for later this month.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
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