Yahoo Finanzen Alibaba Group Holding Ltd (BABA): Rising Star or Fragile as China?
The colorful character Ali Baba made quite the splash when 18th century readers encountered him in "One Thousand and One Nights." So it makes sense that Jack Ma, the founder of Chinese e-commerce giant Alibaba Group Holding (BABA), has emerged as quite the character himself -- and has made a splash of his own.
A former English teacher, Ma makes no secret of his past flops. He failed his Chinese college entrance exam three times. He applied for 30 jobs and struck out. Every time. Once at a KFC, Ma was beaten out by 23 hopefuls. He was applicant No. 24.
Ma also looked poised to continue to extend his losing streak when he formed Alibaba: It was 1999, the height of the dot-com bubble. But today, Ma might well to be rich enough to snap up every KFC in the world. In September 2014, his company produced the largest initial public offering in Wall Street history -- worth a stunning $25 billion.
But if you bought in BABA back then and held it you're no better off today, as the stock has only risen 3 percent since going public. In fact, that's likely an Alibummer given that today's price stands way off the November 2014 peak of $119 per share, which marked a 75 percent jump from the IPO price.
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Some experts maintain that Alibaba's IPO bust put a damper overall on IPO hopefuls from The People's Republic. But not everyone agrees that Alibaba stock has since been a disappointment.
"I wouldn't call it a bust," says Nabil Elsheshai, senior research analyst with Thrivent Financial, headquartered in Minneapolis. "Like a number of internet companies, BABA went public as it was transitioning from desktop to mobile monetization. This transition suppressed the numbers, though it looks like the company is now on the other side of that transition."
Elsheshai has a point. The lining on Alibaba's share price cloud -- though more stainless steel than silver at this point -- is that BABA has surged close to 60 percent since hitting a near-record low of $60.89 per share in February. It now trades just shy of $97, largely the result of beating Wall Street expectations by a mile for its second quarter of 2016. Since Aug. 8, the stock has gained 13 percent.
Yet as recently as June, SoftBank sold $7.9 billion worth of BABA stock, sending share prices down. What's more, the Securities and Exchange Commission is investigating Alibaba's accounting practices and their possible lack of transparency.
Thus it's arguable that Alibaba stands at a definitive crossroads. Will it surge forward to take a permanent place, outside China, beside Amazon.com (AMZN) and other global e-commerce titans? Or will its struggles get the best of it and force it to retool its approach?
At least one piece of intrigue behind Alibaba involves its intertwined relationship with Yahoo (YHOO). At the end of 2015, Yahoo tried to monetize its considerable Alibaba stake, worth $32 billion.
The transaction failed after the Internal Revenue Service refused to approve its tax-free status, posing the threat of massive tax consequences for Yahoo. And when Yahoo's stock price slid in 2015, Alibaba's did as well -- highlighting the symbiotic relationship between the two companies.
"There may have been some impact based on concerns about what Yahoo would do with its stake in BABA, since it would significantly increase the amount of shares available for the market to absorb," Elsheshai says.
But it's more relevant, in the months ahead, to take a good look at the company's investment portfolio.
"BABA has a number of investments likely to drive more value over time, including in video and entertainment, cloud platforms for business and its stake in ANT Financial," he says.
Additionally, BABA may not be as concerned about entering Western markets as some people think, says Zen Chu, a faculty director at the MIT Sloan School of Management.
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
"Alibaba is a bet on the Chinese middle class," Chu says. "While its IPO was priced aggressively and the company has had its ups and downs, they are posting their highest growth rates since their IPO." Even with Chinese e-commerce competitor JD.Com (JD) growing fast, "Alibaba still owns the mobile commerce behaviors of China."
With that kind of strong footing on its home turf, "and given the dominance of Amazon and to a lesser degree eBay (EBAY), Alibaba has not really tried to enter the U.S. or European markets by selling directly to consumers in these markets," Elsheshai says.
Yet as its history suggests, Alibaba has the potential to trip itself up.
"The biggest factors affecting Alibaba value are their massive investments outside and inside China, and whether those bets will prove positive," Chu says. "Those include their foray into digital health care with Ali Health. The history of mediocre corporate venture investments may outweigh the natural growth and unfair advantages Alibaba has in their core commerce business."
And even if BABA succeeds on all fronts, a much bigger force could cause it massive turbulence, given the dedication of its business to its homeland: the oft-volatile economy of China itself.
The "Flash Crash of 2015" -- which transpired a year ago this month -- showed there's no Great Wall of Wall Street that can insulate U.S. markets from China's financial woes. Case in point: For brief a period, the Vanguard Consumer Staples fund sank 32 percent.
Overall, it was a meltdown of China Syndrome proportions, and even with strong business fundamentals, Alibaba would no doubt feel the heat of any Chinese economic collapse.
In the meantime, BABA continues to chart a course toward stability and prosperity -- though the caution flag continues to fly.
[Read: How to Hedge Against Inflation With Commodities.]
As Elsheshai says: "For U.S. investors, it's sometimes harder to get comfortable with the trends taking place in China's economy that might negatively impact Alibaba."
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