Alibaba Stock Will Struggle to Overcome These Short-Term Headwinds
Sentiment towards Chinese stocks is deteriorating and new threats are emerging to China's economy
With sentiment towards Chinese stocks deteriorating, new threats emerging to China’s economy and Alibaba (NYSE:BABA) continuing to face a strong threat in China from JD.com (NASDAQ:JD), now is not a good time to buy Alibaba stock.
The U.S. Congress looks poised to pass a bill that “would require companies to certify that ‘they are not owned or controlled by a foreign government.'” The proposed securities law “would also require the Securities and Exchange Commission to bar trading in any shares where the company’s auditor hasn’t faced an inspection from the Public Company Accounting Oversight Board for three consecutive years.”
The latter board “oversees the audits of public companies hoping to access the U.S. capital markets in an effort to reduce underhanded business practices and fraud.”
President Donald Trump, who has been hawkish on China for many years, is likely to sign the bill. But I don’t expect the law to ultimately prevent major Chinese companies like Alibaba from trading on U.S. stock exchanges.
Nevertheless, since May 19, when news coverage of the bill ramped up, Alibaba stock has fallen about 8%. I believe that the legislation is likely to keep sentiment towards most Chinese equities, including Alibaba stock, bearish for the next month or two at least.
The Real Threat to China’s Economy
The threat to China’s economy from the Cold War between Beijing and Washington is very real. Given China’s recent aggressive actions towards Hong Kong and American planes, the tension between the nations looks poised to accelerate as long as Trump stays in office. Among centrist and right-wing American politicians, including the president, there are very strong calls to bring more manufacturing capacity back to the U.S.
Particularly if Trump is re-elected, these calls are likely to turn into concrete actions that will, in turn, meaningfully hurt the Chinese economy and Alibaba. Longer-term investors should consider this issue before buying Alibaba stock.
Alibaba’s Growth Engines Remain Unprofitable
As I’ve pointed out previously, one of Alibaba’s two main growth engines — its cloud business — is growing rapidly but is still in the red.
That was still the case last quarter. Even though the revenue of Alibaba’s cloud business jumped 58% versus the same period a year earlier, the unit’s EBITDA, excluding certain items, came in at a loss of $25 million.
Meanwhile, the growth of its other main growth engine — overseas e-commerce — wasn’t too impressive. Specifically, the revenue of its overseas retail e-commerce business, which accounted for 5% of its overall revenue, increased 8% year-over-year. Alibaba’s international e-commerce wholesale revenue did surge 15% YoY. But that business only accounted for 2% of Alibaba’s total revenue, so it probably won’t move the needle for the company’s results and BABA stock.
JD.com Is a Tough Competitor
In-line with the predictions in my previous column, JD.com delivered superior e-commerce growth in China during the pandemic, compared to Alibaba. Specifically, JD’s “net revenues from the sales of general merchandise products” jumped 38% YoY in Q1, while its net service revenue surged nearly 30% YoY. Conversely, Alibaba’s China commerce revenue rose only 21% YoY, while its overall “core commerce” revenue increased 19% YoY.
Overall, the companies’ top-line growth was similar, with Alibaba’s sales rising 22%, versus JD’s 21% gain. But Alibaba’s non-GAAP net income increased 11.5% YoY, while JD’s soared 65% YoY.
Some of those who are bullish on Alibaba stock will argue that JD is growing more quickly due to the law of large numbers. There’s some truth to that contention. Still, I think it’s undeniable that JD’s profits are climbing much more quickly than those of Alibaba and that JD appears to be gaining more market share than Alibaba in the Chinese e-commerce market.
One reason for JD’s faster profit gains is likely the fact that, according to the company, its costs are 50% below those of its peers. That’s probably because the company has built its own logistics subsidiary, JD Logistics.
The Bottom Line on Alibaba Stock
While I don’t expect Alibaba to be forced to delist from the New York Stock Exchange, its shares are likely to underperform in the near-term as Congress considers putting new limits on Chinese stocks. Meanwhile, the Chinese economy looks poised to meaningfully decelerate versus its 2019 levels and JD is gaining more market share in the Chinese e-commerce market than Alibaba.
Given these points, I recommend staying away from both Chinese e-commerce stocks at this point. But investors who are seeking exposure to the sector are better off with JD than Alibaba stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own a position in any of the aforementioned securities.