Why the Decline of Alibaba (BABA) Stock Is Overdone

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Shares of Alibaba (NYSE:BABA) have sunk in May amid escalating trade tensions between the U.S. and China. Specifically, ever since May 5 when U.S. President Donald Trump fired off his now-infamous tweet in which he threatened to raise tariffs on China, BABA stock has shed more than 20% of its value.

"Counterfeit" lawsuit just noise for BABA stock

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This recent 20% decline in BABA stock price has been completely caused by rising trade tensions between the U.S. and China. Prior to the May 5 tweet, BABA stock price was up more than 40% year-to-date amid improving China economic conditions, and Alibaba stock was on a seemingly unstoppable track towards $200. Now, after the tweet, it seems like BABA stock is destined to give back all of its 2019 gains.

There is merit behind the large decline of BABA stock. As goes the China consumer economy, so goes Alibaba. But the bigger the trade war gets, the less confident the Chinese consumer gets, the less they spend, and the lower Alibaba’s growth rates will be. BABA stock price will fall in tandem with Chinese consumer spending.

Having said that, this bear thesis on Alibaba stock ignores two important factors: China is still growing very quickly, and Alibaba is still growing very rapidly. China’s consumption growth will slow because of the trade war. But consumer spending will continue to increase at a very healthy rate. Meanwhile, Alibaba will continue to innovate relentlessly in an effort to expand its share of rapidly growing consumer purchasing in China and Asia. Thus, despite the trade war, Alibaba looks poised to continue to grow quickly.

That’s why research firm Stifel is recommending that investors buy Alibaba stock in the wake of its dip on trade-war worries. I agree with that call. BABA stock has dropped tremendously  on near-term concerns that aren’t very important, since the company remains well-positioned to grow quickly. Buying a non-cyclical winner on near-term weakness usually turns out to be a winning strategy.

China Is Still Growing

Consumer spending in China is expanding at one of the most rapid rates in the world. While the trade war will weigh on those sky-high consumption growth rates, it won’t completely destroy the country’s upbeat consumer spending outlook. Instead,  China’s consumer spending will continue to grow at one of the most rapid paces in the world.

There’s been a lot of news lately about how China’s retail sales growth hit a 16-year low in April. But, despite hitting a 16-year-low, the country’s retail sales still surged an impressive 7.2% year-over-year. In America, retail sales rose 2.8% year-over-year in April. In Canada, retail sales rose 2.6% year-over-year in March.

Thus, while China’s retail sales growth did dip to a 16-year low in April, its retail sales growth was more than twice as fast as in the U.S. and Canada. China’s retail sales growth may continue to slow as the trade war heats up. But it will likely remain north of 5%, due to continued urbanization tailwinds, and 5%-plus retail sales growth would enable China to remain one of the fastest-growing consumer economies in the world.

Meanwhile, looking at the big picture, it becomes clear that China’s consumer spending in general and consumers’ spending on e-commerce in particular  should keep growing by leaps and bounds for a long time. China’s household expenditures per capita are about 15% of U.S. per capita household expenditures. Meanwhile, China’s internet penetration rate is below 60%, versus roughly 90% in the Americas and throughout Europe.

Alibaba’s Share Is Increasing

BABA’s revenues increased over 50% last quarter. That level of expansion has become the norm at Alibaba, mostly because this company continues to do everything right to capitalize on Asia’s non-cyclical, strong economic growthj.

First and foremost, the company continues to push forward on the Chinese e-commerce front, and is only becoming more and more Amazon (NASDAQ:AMZN) like in terms of its dominance of Chinese e-commerce.

Second, Alibaba’s logistics unit, Cainao, is aggressively expanding its reach and jumping into automation, two initiatives which will help give Alibaba’s e-commerce operations a big boost. Third, Alibaba is expanding its e-commerce businesses in other rapidly growing southeast Asian economies. Fourth, the company has a rapidly expanding cloud business that is the largest in China. Fifth, BABA has multiple digital media and entertainment initiatives in the pipeline, a few of which could one day be huge successes.

Overall, the company is doing a lot, and all those initiatives are helping the company gain share in the still-quickly growing China and Asia consumer economies.

So long as this remains true, Alibaba’s  revenue will continue to increase at a  20%-plus rate for the foreseeable future, with largely stable margins that will help drive 20%-plus profit growth, too. BABA stock currently trades at just 23 times analysts’ consensus-forward-earnings estimate. That’s just too low for BABA stock, considering the company’s 20%-plus profit growth.

The Bottom Line on BABA Stock

Despite the recent slide of BABA stock price, Alibaba stock has advanced 10% in 2019. The recent retreat of BABA stock  has everything to do with trade tensions. When trade tensions were easing, BABA stock was in rally mode. When trade tensions went back to escalating, BABA stock price dropped.

Regardless of how this trade war plays out, China’s consumer spending will continue growing at one of the fastest rates in the world. Further, Alibaba will remain the leader of China’s e-commerce sector. Ultimately, that means BABA stock price will rise over the long-term, due to BABA’s tons of growth potential. As a result,  buying the recent dip of Alibaba stock is the right move for long-term investors.

As of this writing, Luke Lango was long BABA stock and AMZN. 

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