What’s Weighing on BABA Stock?
Alibaba Group Holding Ltd (NYSE:BABA) is taking a slight beating from markets this week, but I’m not too worried. There was a bad piece of news that spooked most investors, but they’re not seeing the entirety of BABA stock.
At the time of writing, Alibaba’s share price was down almost three percent. The company faced a setback in its emerging healthcare division, sure, but the negative response seems way overblown. Let me explain…
The Chinese government was trying to improve its medical system with a program that monitors drug sales. All pharmaceuticals would need to meet the appropriate regulatory standards, which would in turn reduce waste in the system. (Source: “Alibaba Health Swallows Bitter Pill, as China Halts Drug-Monitoring System,” Wall Street Journal, February 22, 2016.)
China’s Food and Drug Administration (FDA) owned the software that tracked the sales, but it was operated by an Alibaba subsidiary, Ali Health. This allowed Ali Health to sell its drugs online, as well as promote Alibaba’s digital payments system, “Ali Pay.”
Of course, rivals sued the FDA for giving Alibaba an unfair advantage. And they won. China just suspended the tracking system, which led to the drop in BABA stock.
The Upside for BABA Stock
Is that a bad piece of news? Sure. It certainly dims the outlook of Ali Health, whose shares are down 14% in Hong Kong. Pretty much all of the company’s $4.8 million in revenues are associated with that tracking system. However, as a whole, Alibaba is fine.
I think the company can survive that tiny loss, especially considering it has a market capitalization of $164.2 billion. It’s just not something that should impact the stock, but markets had already gotten excited about the prospect of juicy pharmaceutical profits.
So naturally, they had to throw a tantrum when it didn’t go their way. You can hardly blame competitors for getting upset, though. Alibaba had an entrenched position within the industry. They simply forced it to share the limelight.
Since the potential size of this market is about $100 billion, I think there’s room enough for several players. In the meantime, Alibaba should focus on further international expansion to reduce its geographic risk.
The company is well on its way to becoming a global powerhouse. Its portfolio of products is diverse and technologically advanced enough to compete with the likes of Amazon.com, Inc., Alphabet Inc, and Facebook Inc.
How it competes in that contest will be a far better barometer of Alibaba’s strength than a setback in its healthcare division. Personally, I’m bullish on BABA stock because of its sheer size. The company has an enormous consumer base that could carry it to victory.