How Will Alibaba Stock Fare Against the Ongoing U.S.-China Trade War?

Baba Stock Forecast

A massive trade war between the U.S. and China, the world’s two largest economies, will have lasting effects on not just the two warring nations, but on the global economy.

How will Chinese e-commerce juggernaut Alibaba Group Holding Ltd. (NYSE:BABA) fare in the long run if the U.S.-China trade war drags on?

The company’s share price has fallen 17% since the start of the year, but BABA stock’s long-term forecast actually remains quite bullish.

U.S.-China Trade War

President Donald Trump campaigned on his “America First” platform, promising to take care of Americans and the U.S. economy at any cost. Even in the early days of his campaign, economists knew Trump was hinting at trade wars.

It’s no surprise that Trump’s biggest trade-war target has become China. He has accused the country of unfair trade practices, manipulating its currency, and—more broadly—of taking advantage of the United States. China, meanwhile, has accused the U.S. of being an economic bully.

Early this year, the trade war between the U.S. and China took off. In January, the U.S. imposed a tariff on solar panel imports. This was aimed squarely at China, since most solar panels are manufactured there.

Since then, the U.S. has added several more tariffs on different types of Chinese goods. China has naturally responded in kind each step of the way.

Is the U.S. Winning the Trade War With China?

When it comes to trade wars, declaring a winner is never easy.

Trump’s new tariffs are bad for America’s beleaguered retail sector. Amidst store closures and layoffs, American retail companies now have to decide whether to raise their prices of goods coming from China or absorb the cost increases. Neither option will please investors.

Some American retailers will try to shift their production out of China, but that can’t be accomplished overnight.

On the surface, it appears that the U.S. is taking its trade war with China in stride. The U.S. dollar is strong and the renminbi has been tanking. U.S. stocks are on fire. Meanwhile, China’s beaten-down stock market has been one of the worst performers in 2018.

On top of that, the U.S. imports a lot more Chinese goods than China does American goods. This means the U.S. can hit China with more damaging tariffs than China ever could in return.

How Alibaba will respond to the U.S.-China trade war is uncertain.

Jack Ma Warns That China-U.S. Trade War Could Last 20 Years

Alibaba founder and CEO Jack Ma believes that the effects of the trade war could last for two grueling decades.

Despite that, Ma remains upbeat and positive. At a recent news conference, he said, “There’s no country like China in the world. With political stability, social safety and 6 percent-plus economic growth, we have the best business environment.” (Source: The New York Times, op cit.)

This doesn’t mean Alibaba won’t experience growing pains, with investors white-knuckling the odd roller-coaster ride.

Ma has warned that the trade war between the U.S. and China will outlive Trump’s turn in the White House. “It’s going to last long, it’s going to be a mess,” he said, adding that the U.S-China trade war could last “maybe 20 years.” (Source: “Jack Ma: US-China trade war could last 20 years,” CNN, September 18, 2018.)

To counter the trade war, Ma has suggested that China shift its focus to exports on the “Silk Road” trade route, including Southeast Asia, Africa, and Europe.

Although the U.S. economy and stock market has been chugging along, Ma  warned that it will be the U.S., not China that loses out in the long run. Whether that’s true remains to be seen.

Alibaba’s History

Alibaba started as an online platform where businesses could sell their products to other businesses. The company really took off in 2003 when it opened its “Taobao” marketplace, where retailers could sell directly to consumers. It’s like China’s version of Amazon.com, Inc. (NASDAQ:AMZN).

To make transactions easier, and to make money from those sales, Alibaba rolled out Alipay, its online payment service, which later became Ant Financial.

Over the last number of years, Alibaba’s strategic acquisitions, including Lazada, Youku Tudou (a Chinese video streaming giant), Cainiao Logistics, Hema (a supermarket company), and Ele.me Inc. (a food delivery platform), have helped diversify the Alibaba empire and significantly increase its revenue. (Source: “How Much Will China Retail Contribute To Alibaba’s Top-Line Growth By Fiscal 2020?” Forbes, October 8, 2018.)

The company also owns or has big stakes in some of China’s biggest media companies, including Weibo, the “Twitter”-like social media site, and The South China Morning Post, an English-language newspaper based in Hong Kong.

Still, Alibaba’s largest revenue stream comes from retail sales within China. The key here is that, although Alibaba sells its products to the U.S., it is not as reliant on the U.S. for its sales revenue as investors might think.

In September, Ma, who has a personal wealth of $40.0 billion and is, on paper, China’s wealthiest person, said he will be stepping down from Alibaba. (Source: “Alibaba’s Jack Ma, China’s Richest Man, to Retire From Company He Co-Founded,” The New York Times, September 7, 2018.)

Alibaba Is Booming

Despite ongoing concerns about the U.S.-China trade war, business at Alibaba has been booming. In August, Alibaba announced that first-quarter revenue, for the period ended June 30, 2018, increased 61% year-over-year to $12.2 billion. (Source: “Alibaba Group Announces June Quarter 2018 Results,” Alibaba Group Holding Ltd., August 23, 2018.)

Year-over-year revenue was up across the board. Revenue from core commerce rose by 61%, revenue from cloud computing by 93%, revenue from digital media and entertainment by 46%, and revenue from innovation initiatives by 64%.

Diluted earnings in the quarter fell by 42% year-over-year , but that was not a result of the trade war or bad business decisions. It was largely due to the increase in the valuation of Ant Financial. Alibaba gave some employees awards based on Ant Financial shares, which increased the group’s compensation expenses.

Had this not happened, Alibaba said its diluted earnings per share would have increased by 33%.

Strong Growth Expected to Continue

The strong sales growth at Alibaba Group is expected to continue. Maggie Wu, the company’s chief financial officer, said,

The exceptional growth across our major segments of core commerce, cloud computing and digital media and entertainment, validates our strategy of investing in customer experience, product, technology and infrastructure for the future. We remain confident in our ability to continue to gain market leadership by delivering unique value propositions to our business customers, partners and consumers.

(Source: Ibid.)

It’s not just Alibaba’s management team that thinks the digital retail giant will continue to do well.

Some analysts expect Alibaba to report annual revenue growth of 30%–35% by the end of this decade. Revenue from the company’s Chinese retail business is expected to increase by more than 25% annually, from $28.1 billion in fiscal-year 2018 to $45.5 billion in fiscal-year 2020. (Source: Forbes, op cit.)

Despite fears about the trade war and a slowdown of the Chinese economy, the outlook for Alibaba Group remains solid.

That’s because Alibaba is not a target of the tariffs per se. Rather, the sellers on Alibaba’s platforms are. If they’re affected by the tariffs, they will have to raise their prices. Then again, most of Alibaba’s retail revenue comes from China, and those sales do not—for the most part—involve American products.

Baba Stock Chart Action

Alibaba’s share price has not exactly been stellar over the first 10 months of 2018. In fact, the company’s share price is down 17% through the end of October. That sounds a lot worse than it really is though. The decline is attributed in large part to founder Jack Ma announcing plans to retire.

Alibaba’s share price has been hit more by fears about the trade war and Jack Ma’s retirement than for any concrete economic reasons. As mentioned earlier, business at Alibaba has been booming and the company’s long-term outlook remains robust.

Chart courtesy of StockCharts.com

The Future of Alibaba

China’s e-commerce market is expected to grow from $1.1 trillion in 2018 to $1.7 trillion by 2020. Keep in mind, China’s e-commerce market is still green, with only 38% of the population making online purchases.

Alibaba, with an e-commerce market share of more than 50% in China, already has brand loyalty and awareness. The company can’t help but benefit from the broader adoption of online shopping.

But even then, the Chinese market is only so big, which is why the company has been making acquisitions and partnerships in key international regions.

In March, Alibaba invested $4.0 billion in Lazada, an online shopping platform in Southeast Asia (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam). (Source: “Alibaba Invests Additional USD2 Billion in Lazada,” Alibaba Group Holding Ltd., March 19, 2018.)

In September, Alibaba announced that it had partnered with Russian Internet firm Mail.Ru to launched a new e-commerce joint venture. (Source: “Alibaba is helping Russia go big in online shopping,” CNN, September 11, 2018.)

Under sanction from the U.S. and Europe, Russia has been looking to build closer business and political ties with China. This includes developing high-speed Internet networks and e-commerce.

Like China, the Russian e-commerce market is still in its infancy, with just 20% of Russians shopping online. In 2015, online sales in Russia hit $24.0 billion.

Analyst Take

While there is reason to be concerned about a lingering trade war between the U.S. and China, Alibaba is busy building a global, online marketplace.

This should help Alibaba report strong sales growth, ongoing profitability, and reward buy-and-hold investors.

For a number of reasons, the recent pullback in Alibaba’s share price could be more of an opportunity than anything.