China Stock Market Crash Hurt Alibaba Stock
Although Alibaba Group Holding Limited (NYSE:BABA) had the largest initial public offering (IPO) in human history, Alibaba stock was significantly damaged by China’s stock market crash this past summer. However, Alibaba just implemented a strategy to save BABA stock if the Chinese economy crashes and burns. (Source: “How Alibaba Can Resist China Slowdown,” Wall Street Journal, October 27, 2015.)
The strategy may become necessary for Alibaba stock if the Chinese economy continues to fall apart. After the China stock market began unravelling on June 12th, we saw the Shanghai Composite Index lose over 30% in a single month. It was a bloodbath.
The contagion extended to cross-listed equities like BABA stock. Over the summer, Alibaba stock fell by nearly 33.8% to a low of $57.39. It has since recovered to around $79.16, but that still represents a net negative of 8.31%.
Overall, BABA stock is down 23.51% from the start of the year. Alibaba is an online retailer like Amazon.com Inc., which means it’s exposed to economic headwinds.
When average Chinese citizens lost some, or all, of their savings in the stock market crash, it curbed the amount of online shopping they did. Since Alibaba stock is dependent on e-commerce, the pessimism on BABA stock’s future is understandable.
But here’s what the bears are missing.
A Rally in BABA Stock?
The total amount of goods sold through Alibaba, referred to as gross merchandise value, dropped 34% from the most recent quarter. That’s part of the reason investors were fleeing BABA stock, but I still think that’s misguided. Just look at its year-over-year growth.
From the same quarter last year, Alibaba’s gross merchandise value actually jumped 28%. Alibaba had significantly more activity than a year ago, but investors only cared about the most recent quarter.
That seems like a shortsighted reason to suddenly turn bearish on Alibaba stock. Seriously, try to think beyond a quarter.
Big firms like Alibaba need an investment horizon longer than three months to execute a strategy that’ll keep them competitive. This obsession with quarterly results hinders the ability of Alibaba stock to generate profits over the long term.
In any case, investors who search beneath the surface of Alibaba will find plenty of reasons to get bullish on BABA stock. Even better than the increased activity on the web site was a 32% jump in revenue from a year earlier.
Alibaba stock is starting to climb as investors absorb these core facts.
More Profitability Could Send Alibaba Stock Soaring
One of the main reasons for investors to stay confident on Alibaba stock is the company’s focus on squeezing more revenue out of each transaction. These kinds of efficiency manoeuvres are incredibly important to the longevity of BABA stock, especially if it’s to survive an economic collapse in China.
Alibaba is edging up the amount it makes per transaction from 2.3% to 2.42%. It may not seem like a lot, but Alibaba has to ease in the higher commissions to forestall a mass exodus of customers. The increased fees will come as a boon to the Alibaba stock during the dark days ahead.
This is a subtle signal to investors of BABA stock. It says that we are willing to make every dollar of revenue go as far as possible in order to keep our shareholders happy. That kind of attitude makes me a big fan of Alibaba stock.