Cold warriors seem to want Alibaba (NYSE:BABA) to fail. They’re spinning the company’s problems and the nearly 50% drop in BABA stock as a personal story, as the fall of founder Jack Ma. He defied the political leadership and paid the price. To hear them tell it, President Xi Jinping is just Mao Zedong in a suit.
But they’re ignoring a simple reality: Alibaba is too big to fail. It’s too embedded in China’s economy to be put down. It’s not the Amazon (NASDAQ:AMZN) of China. It’s much more powerful than Amazon.
It’s also an important representative of China around the world. Kill Alibaba and you’re not just a communist, but a very stupid one.
BABA Stock May Be Cheap, but Earnings Are Likely to Disappoint
In mid-September, I wrote that BABA stock might be considered dirt cheap. For instance, Alibaba’s valuation is about half that of some of the American Cloud Czars’ valuations. But since then, I’m down 10% on my investment in BABA stock, even after the recent run-up in shares.
Alibaba is expected to report earnings on Nov. 5. The numbers are likely to disappoint. Analysts recently reduced their forecasts for the company’s September quarter based on weak consumer spending. Chinese consumers are nervous, and the country is in a world of hurt. Furthermore, the quarter won’t include Alibaba’s popular “Singles Day” promotion, which falls on Nov. 11.
Despite a potentially weak third quarter, Alibaba is still estimated to generate $141 billion in revenue this year. And the company is being helped by a rising yuan, which makes Alibaba’s sales and profits more valuable.
You should also know that there are still plenty of profits. In its June quarter, more than 20 cents of every dollar became net income. For its 2020 fiscal year, 27.5% of revenue became net income. In other words, Alibaba remains a highly profitable company.
Why China Came Down on Alibaba
Unlike Walmart (NYSE:WMT) or even Amazon, Alibaba is a middleman, not a merchant. Its technology has become essential to the suppliers it serves. There is no Chinese Intuit (NASDAQ:INTU) or Salesforce (NYSE:CRM). Alibaba Cloud offers customers a full accounting suite. It’s a customer’s entire computer department.
It’s that power the Chinese government went after, as Alibaba’s Alipay moved to become China’s prime lender and dominant payment system. If an American company had Alibaba’s power and the American government went after it on the same basis, economic reporters would cheer.
Taking the Cloud Czars down a peg is a popular stance in America, as well as in Europe. The Cloud Emperors, which also include Tencent Holding (OTCMKTS:TCEHY) and Baidu (NASDAQ:BIDU), are more powerful than their Western counterparts because there was no pre-cloud economy to build on.
That said, China’s government must be careful. China’s economy faces a huge debt crisis. It faces environmental problems that put ours to shame. Its huge middle class is scared, and with good reason. Taking Alibaba down too hard would be like pulling the bottom log out of a Jenga stack or blowing too hard on a house of cards.
The Bottom Line on BABA Stock
Buying BABA stock because co-founder Jack Ma showed up in Hong Kong after nearly a year is a dumb move. Ma remains a member of the Chinese Communist Party.
But the economic efficiency created by Alibaba is essential to pulling China’s economy back from the brink and saving its middle class. I would argue the government’s aim is mainly to create more companies “like it.”
I could be wrong. Maybe Xi Jinping is Kim Jung-un, as the cold warriors believe. In any case, it will take time for China’s economic crisis to resolve. And it will take months for Alibaba to achieve fair value again. Optimists can buy it here, but you need to be one first.
On the date of publication, Dana Blankenhorn held long positions in AMZN and BABA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.