What’s in Store for BABA Stock?
Markets have been pummeling Alibaba Group Holding Ltd (NYSE:BABA) on fears of an economic slowdown in China. However, the damage to BABA stock is like a temporary setback, which presents an excellent opportunity for profit-hungry investors.
I’m not the only one who thinks Alibaba is mistakenly caught in the crossfire; some major institutional players are thinking along the same lines. Don’t get me wrong, the Chinese stock market crash is definitely going to affect BABA stock, but I think investors have misread what that impact is going to look like.
After all, the Chinese stock market crash is more a story of excessive leverage and government mismanagement than it is of missed earnings. It’s not like the market had overvalued Chinese stocks on a fundamental basis. Investors had simply multiplied their bets after margin trading became legal in China.
Then the Chinese government tried an overly aggressive strategy to curb the leverage, which only led to more panic and a massive stock market crash. That was in the summer of 2015. Things simmered down for a while, but the panic resurfaced a few weeks ago.
Alibaba’s International Focus Provides Insulation
Over the last few years, Alibaba has transformed itself. Gone is the domestic giant whose ample operations stayed on the other side of the world. It became, under the stewardship of Jack Ma, a global conglomerate with deep pockets and broad goals.
The major turning point for Alibaba was the cross-listing of its stock on the New York Stock Exchange (NYSE) in what was the largest initial public offering (IPO) of all time. By stepping into U.S. markets, Alibaba was effectively declaring itself a force to be reckoned with.
What’s important to note in valuing BABA stock is that China’s stock market is not symbolic of the Chinese economy. The relationship between the two may seem strange to Americans, but that’s because our stock markets are significantly larger.
The U.S. stock market is one-and-a-half-times the size of the American economy. That is to say, the collective worth of publicly listed companies exceeds the size of the U.S. economy by an order of 1.5.
This stands in stark contrast to China, where the stock market is only half the size of the economy. Therefore, a Chinese stock market crash, while harmful, only affects the people who had enough money to invest in Chinese stocks in the first place. The wide majority of Chinese citizens are probably unaffected.
There are segments of the real economy—not the financial economy—that could still keep growing in Alibaba’s favor. That’s why institutional investors like RBC Capital Markets held on to their “Outperform” rating on BABA stock.
Rural Growth Could Buoy BABA Stock
RBC has a $95.00 price target on Alibaba stock this year, suggesting a 36.5% gain. That would be enormously beneficial to the firm’s long-term trajectory, not to mention its shareholders. But where is the growth coming from?
Many analysts agree that expanding Internet access in China is going to reap huge rewards for Alibaba. As China’s largest e-commerce retailer (by a mile), Alibaba estimates the rural market could be worth $74.0 billion in 2016. (Source: “Why Alibaba Is Renewing Its Focus On China In 2016?” Forbes, January 8, 2016.)
By delivering products to this new consumer market, the company could also deliver BABA stock some serious returns.