Alibaba (NYSE:BABA) stock had a rare bad run last week, falling almost 6%.
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Considering its attractive business model and historical growth multiples, many analysts would find this development surprising. However, escalating tensions in Southeast Asia and a resurgent novel coronavirus are pushing the stock down.
Still, these developments have little to do with the operational metrics of the business. Hence, I believe there are plenty of reasons to remain bullish on Alibaba stock stock. Chinese demand is rebounding, and the U.S. economy is also showing signs of life. Meanwhile, the business-to-business platform operated by Alibaba continues to give it a significant leg-up on its competition, especially with respect to its more famous American counterpart, Amazon (NASDAQ:AMZN).
Despite the occasional hiccup, Alibaba stock has a lot going for it. You won’t go wrong investing in this one.
What Sets Alibaba Stock Apart?
The reason why Alibaba is different from a lot of its peers is the unique business model. Although it did not pioneer the business-to-business e-commerce system, it is now its foremost expert, giving it a massive edge over the likes of Amazon, which operates a business-to-customer model.
The critical difference between the two systems is that Alibaba does not need logistics facilities and warehouses to store goods that need to be shipped. Not having to do so makes for higher operating margins. Even from a liquidity standpoint, Alibaba is cash-rich, and its debt-equity ratio stands at 0.20 times, which is prudent, considering the industry average is 0.67 times.
China-India Tensions Are Pressuring Alibaba Stock
This is not great news for Alibaba. The tech giant has long sought to diversify its revenue sources away from China to other geographies. But those ambitions have hit a snag due to tensions between the two nuclear-armed states.
Since we are still in the early days of this conflict, we don’t know where this is going. At the moment, the administration of Prime Minister Narendra Modi is targeting apps developed in China. However, the government may want to punish every company that has even the remotest link to Beijing.
For example, Alibaba has a significant stake in several platforms in India. Through two subsidiaries, the company holds a 40% share in payment app Paytm. Meanwhile, Alibaba affiliate, Ant Group, formerly known as Alipay, is the largest stakeholder in Zomato, India’s most prominent food delivery provider.
A recent news report revealed that due to rising tensions, the company could find it challenging to tap into the $100 million equity capital it attracted in its last funding round from Ant.
U.S.-China Trade Issues
The recent troubles in India come at a particularly bad time for Alibaba. Just a month ago, the U.S. Senate passed a bill that imposed greater regulation on Chinese companies. According to the law, any company found in violation of U.S. Securities and Exchange Commission rules could face delisting.
There are several reasons why the bill was tabled in the first place. Although trade tensions between the U.S. and China are on the decline, there is still a lot of bad blood. There is also a feeling in Washington that companies that are either indirectly or directly controlled by the Chinese government must face greater scrutiny.
Finally, fraud cases like Luckin Coffee (OTCMKTS:LKNCY) reinforce the notion that the regulatory environment in China is not as robust as the U.S., so there is a need for greater regulation when dealing with Chinese companies.
Ant Group IPO
One of the driving forces of Alibaba stock stock recently has been the impending IPO of Ant Group, formerly known as Ant Financial. The fintech firm has revealed that the IPO will take place simultaneously on the Hong Kong Stock Exchange and Shanghai Stock Exchange’s Star Market.
Reuters said that bankers are valuing the IPO at over $200 billion. It’s a no-brainer that every Chinese investor would love to get their hands on this company, considering that it’s a crucial linchpin in digitizing China’s service industry.
My Final Word
Although I have highlighted a significant number of risks Alibaba is facing, I remain bullish on the stock. It has an attractive business model and wide moat, relative to peer Amazon, Alibaba stock trades at a 33.78x trailing price-earnings ratio. That may seem steep, but Amazon trades at 152.74x, just to put things in perspective.
The company’s ambitions to spread its wings beyond China may not have borne fruit. But there is plenty to cheer for if you are an investor that values fundamentals. The business model remains enticing, holdings are diversified, and its business divisions are flourishing. Covid-19 has also done little to dent the company’s business prospects. In fact, it has led to increased traffic on Alibaba’s various platforms.
Bottom line: You can’t go wrong parking your capital in the Asian tech juggernaut.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.