With U.S.-China trade relations turning sour, it’s been a generally good idea to bail out of stocks with China exposure. But not all stocks are made the same, a case in point being Alibaba BABA.
Here are some solid reasons you should be buying this stock-
1. China’s leading ecommerce company has a solid track record. Between fiscal years 2016 to 2019 (ending March), revenue grew more than 254% while earnings grew around 138%. In the just reported quarter, revenue grew 21.7% while earnings before non-recurring items grew 63.0%. Moreover, it guided to a revenue increase of 33% in fiscal year 2020 to RMB 500 billion.
2. The leading Chinese ecommerce company by far has 58% share in the country as of June 2018 (Statista) with the second player JD.com JD remaining far behind at 16%. Since Alibaba primarily operates in China, i.e., its business activity is primarily in China, it has Chinese government support. The Chinese population is large and Chinese disposable income continues to increase, making it a good market for sellers.
3. Alibaba caters to practically every ecommerce need like food ordering, film and TV, and a ubiquitous mobile and online payments platform (Alipay). The company also has a huge cloud infrastructure business that is even more dominant in China than Amazon AMZN is in the U.S.
Alibaba’s relatively later start has not been a problem for the company because of the government’s protectionism, something that the company can expect to continue in the future. Since the Chinese market is far larger than the U.S. and Chinese competition in the space is even further behind than Microsoft MSFT and Alphabet GOOGL, Alibaba has a solid growth path waiting for it.
4. Moody’s has a positive view of the company’s strengths. SVP Lina Choi says, "We expect that Alibaba's strong revenue growth and robust operating cash flow generation will continue to support its investment needs, and a credit profile appropriate for its A1 ratings."
5. The trade war, especially the last round of Trump tariffs has sent its shares crashing, so that they are now at quite an attractive valuation. As a result, the P/E based on forward 12 months earnings of 28.88X is well below the median value of 33.58 over the past year. It’s also better than the industry’s 38.37X.
6. Interestingly, Alibaba is reportedly considering a Hong Kong listing to raise $20 billion according to people with confidential knowledge of the matter. The company needs to maintain liquidity and increase investment in technology is all we are getting from the read. But considering the U.S. government’s strong stand with respect to Huawei and Hong Kong recently relaxing its listing requirements, Alibaba may be looking to raise funds that can help it pull out of the U.S.
Market watcher and former Trump chief adviser Steve Bannon’s recent comment in the South China Morning Post reads: "The next move we make is to cut off all the IPOs, unwind all the pension funds and insurance companies in the U.S. that provide capital to the Chinese Communist Party." If this is true, it could be an opportunity to make some money.
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