- Alibaba stock and other Chinese stocks have been rallying strongly lately.
- The rally has been triggered by healthy economic data from China.
- Alibaba stock can continue making good gains as the negative perception of Chinese stocks by the market moderates.
Alibaba (NYSE:BABA) stock, and the Chinese market, in general, has been engulfed by a dark cloud for what seems like an eternity. It all started in late 2015 when the Chinese equity markets suddenly came to a screeching halt after enjoying a meteoric rise in the first half of 2015. The market, at first, slowed down a bit, a natural event after a 2-year long bull market, then started creeping downward slowly which served to fuel fears, especially amongst retail investors who had bought Chinese stocks in droves, that disaster was about to strike.
The irrational fears triggered a massive selloff which only served to make the foreboding a self-fulfilling prophecy since everything went downhill from there. An already bad situation was not helped by a continuous trickle of manufacturing and economic data that suggested the Chinese economy was slowing. Any positive data from the Beijing government was viewed with a lot of suspicion and word was out that the government was cooking figures to paint a rosy picture of an economy on the brink of a major recession.
From being darlings in the American equity markets, Chinese stocks suddenly found themselves hemmed between a rock and hard place as the anti-Chinese sentiment reached fever pitch. When the Beijing government recently announced that the economy had grown 6.9% during the fourth quarter, media houses as usual, did not fail to make a sensation out of it by pointing that the Chinese economy had hit its slowest growth in a quarter of a century, never mind the fact that China’s growth over that period was 6x better in absolute terms than U.S. growth over the similar period and better than the E.U. economy combined.
But it finally appears as if at least part of this irrationality about the Chinese market could finally be coming to an end. Many erstwhile beaten-down Chinese stocks have made strong gains over the last couple of days after strong new loans data as well as efforts by the People’s Bank of China, or PBOC, to mop out excess cash signaled that the risk of a cash crunch had passed.
The decision by PBOC came after the dollar retreated relative to the Yuan leading to a 1.3% gain on February 15th 2016, the biggest one-day gain by the Chinese currency since the Beijing government scrapped a currency peg in 2005. The PBOC had made massive cash injections of net 1.7 trillion yuan ($260B) into China’s financial system just prior to the Lunar New Year holiday to avert a possible cash crunch due to heavy seasonal demand for the yuan.
Meanwhile, data from analysts’ estimates showed that Chinese banks had made 2.51 trillion yuan ($385.40 billion) in new loans in the month of January, much higher than expectations by the market. The surprise findings suggest that the Beijing government is going easy on its tight monetary control policy to counter an economic contraction.
Chinese equity markets immediately surged on the back of the positive news with the Shanghai Exchange gaining 3.5% while Shenzen was up 4.3%. Alibaba, one of China’s tech giants, was one of the top gainers with Alibaba stock, piling on gains of more than 10% over the next few days.
Alibaba Stock 5-Day Returns
Source: CNN Money
Other strong gainers were Weibo Corp (NASDAQ:WB) (+9.5%), 500.com (+5.6%), Xunlei (NASDAQ:XNET) (+6.8%), NetEase (NASDAQ:NTES) (+6.7%) Momo (+9.5%), NQ Mobile (+5.4%), 58.com(6.8%), Bituato (+8.9%), Baozun (+6.7%), Leju (+9.4%), among other stocks.
Alibaba stock recently made good gains after the company delivered a fourth quarter earnings beat. Alibaba reported Q4 2015 revenue of RMB34.54B ($5.25 billion), good for 31.9% Y/Y growth with EPS of RMB6.43 ($0.98) a robust 78% Y/Y growth and RMB0.62 ($0.09) better than estimates.
Meanwhile, Alibaba’s gross merchandise value, or GMV, grew 23% Y/Y to RMB964B ($146.57B).
The earnings call marked the second quarter that Alibaba exceeded expectations after a rather long streak of four consecutive earnings misses. This helped to reinforce the notion that Alibaba’s business had not been affected much by the turmoil in the Chinese equity markets. Recent checks by Evercore on Alibaba’s e-commerce business found that 82% of ecommerce shoppers and sellers in China report that Alibaba’s platform provides the best ROI compared to other competing Chinese platforms. Alibaba therefore, remains one of the best ways to invest in China’s burgeoning middle class as well as the Chinese economy in general.
Perhaps the biggest risk in investing in Alibaba stock at the moment lies in the company’s growing investments in Online-to-Offline, or O2O, businesses as I pointed out in this article. Many Chinese e-commerce players, including Baidu (NASDAQ:BIDU) and Tencent have been investing heavily in O2O as they seek to lure more Chinese people to try out ecommerce instead of traditional brick-and-mortar shopping. But these companies have not yet started monetizing the large volume of O2O business they are handling leading to considerable margin pressure. In the case of Baidu, its bottom line has moved from the black to the red due to heavy O2O investments.
Alibaba has in the past not been investing as heavily as Baidu in O2O but has recently accelerated its efforts in this direction by making multi-billion purchases of O2O ventures. While this has not yet started eating into the company’s bottom line, this is a trend that investors should remember to keep an eye on.
Alibaba stock is still down 17.2% YTD and 22.6% over the past 12 months. The stock can continue making good gains as the company keeps growing earnings at a brisk clip while the extremely negative perception about Chinese stocks starts moderating.