I’ve been skeptical about the performance of Chinese e-commerce titan Alibaba (BABA) going forward because of several key factors. However, the company jumped 10% in premarket trading on Friday, and the gains held into Friday morning’s trading.
What gave this company — and several other Chinese retail operations — new hope is a major development from the Chinese government.
It’s certainly good news, and might make some bullish on Chinese retailers. I’m pulling back to neutral, mostly because the overarching lesson seems to still be in play, regardless of the news.
The last 12 months for Alibaba stock have been a general decline. The company lost over half its value over the course of the last year.
The latest news, meanwhile, addresses one key problem facing many Chinese retailers. That problem is Chinese regulators run amok. Signs emerged from the Chinese government suggesting that its crackdown on tech stocks was over.
Better yet, the Chinese government was also prepared to offer stimulus measures to keep the flagging economy afloat.
Wall Street’s Take
Turning to Wall Street, Alibaba has a Strong Buy consensus rating. That’s based on 17 Buys and one Sell assigned in the past three months. The average Alibaba price target of $171.40 implies 71.8% upside potential.
Analyst price targets range from a low of $75 per share to a high of $276 per share.
Investor Sentiment is Unsettled
Here’s where things start to get interesting. A look at investor sentiment suggests that investors are extremely concerned about the state of Alibaba. At least, the investor sentiment that we can pick up on.
Hedge funds are leading the way in the concern factor. The TipRanks 13-F Tracker revealed a massive sell-off as shares held went from around 80.58 million in December 2021 to just over 2.84 million in March 2022.
While the number of retail investors whose portfolios contain Alibaba stock was up 1.1% in the last 30 days, it’s down that same amount in the last seven days.
1 Problem Down, 2 to Go
Undoubtedly, the newly minted program of restraint and help from the Chinese government will help investor confidence. Going from “constant crackdown” to “free money” has to be helpful.
Instead of being an active hindrance, the Chinese government has instead pivoted to being an active help.
The problem here is that, despite this problem being solved, there are still two major problems facing Chinese e-commerce firms who trade on American exchanges.
The first such problem is delisting. This threat comes around every so often, though it does seem to come up a lot less often than it used to. However, that may all change.
One day, the Securities and Exchange Commission or some other government body may pull the plug on such stocks trading on U.S. exchanges.
That’s a serious problem; the sword of fiduciary Damocles is constantly hanging over this stock. That’s not exactly a bell-ringer for a buy-and-hold platform.
The second major problem has less to do with the Chinese government, and more to do with the Chinese people. Like any online retailer, Alibaba depends heavily on discretionary income.
With the Chinese government currently strangling the life out of several sectors of its economy with extreme COVID-19 policies, discretionary income may be tough to come by for a while.
The Chinese government is planning stimulus, and this should help. To what extent — as we’ve already seen — that will help is unclear. However, there’s one big lesson in all this as well.
If the Chinese government can do this kind of damage today, what’s to stop it from doing it again tomorrow? When does Beijing ultimately go too far over some threat, real or imagined, to its political dominance? This can’t make investors confident going forward.
Concluding Views
Granted, Alibaba stock is attractively priced right now. For those who want a piece of Chinese e-commerce, this may be just how to get it. There is a lot of upside potential, as the company is trading close to its lowest targets.
However, there’s a very shaky geopolitical stance to consider here. There’s a government that could kill the whole thing lurking in the background. The threat of delisting may come back into play once more. Alibaba is subject to a great many potential political pitfalls.
That leaves me concerned about putting any serious capital herein. That’s also why I’m neutral. Right now, things are looking up. One misstep, however, and the whole thing comes tumbling down once again.
Discover new investment ideas with data you can trust.
Read full Disclaimer & Disclosure
