Alibaba Earnings Should Open Up the Buying Window

Alibaba (NYSE:BABA) will report earnings on August 20. Investors are expecting to see the company post numbers that indicate the company’s e-commerce business is free of the novel coronavirus and firing on all cylinders.

The company already delighted investors by posting over $98 billion in revenue during the 18 days of its 618 event. And investors are anticipating that the company will post higher revenue from its cloud computing business. Last quarter, Alibaba reported $1.73 billion in revenue, a 58% sequential increase. That was also equal to over 10% of the revenue the company received from its ecommerce segment ($13.3 billion).

If you see the similarity to Amazon, you’re not alone. And the bullish case for BABA stock received further support in July from a letter in which the company outlined its strategic plan for the next ten years.

Some of these goals include serving a customer base of 1 billion people which the company estimates will bring $1.5 trillion in revenue through the platform. Then in 10 years, they want to increase the customer base to 2 billion. Over this span, Alibaba is planning to create over 100 million jobs.

Strategic plans are all well and good, but investors will be focusing on the here and now. And while that looks to have shaken off the effects of the novel coronavirus, there are some stubborn headwinds in place.

U.S./China relations remain complicated

For starters, the relationship between the United States and China remains strained. And that’s being charitable. In 2019, President Trump threatened to delist Alibaba as well as a number of Chinese stocks. It would be easy, almost predictable to advance the narrative that this was a partisan issue limited to the executive branch. However the movement has bi-partisan Congressional support.

It hasn’t happened yet. And it probably won’t regardless of the election outcome. In the first place, the United States seems to lack the political will to actually do it. It’s in neither party’s interest to fuel any recessionary flames that exist. And the damage that could be brought on the financial system is considerable.

Would delisting really hurt Alibaba?

Not really. The company is already listed on the Hong Kong exchange. So it has sufficient liquidity and access to international markets. In fact, the most likely outcome would be that American investors would simply transfer their BABA shares to the Hong Kong listing. Nevertheless, it does illustrate why geopolitical events should matter to investors.

The company’s fundamentals are not transparent

This is the key reason that BABA stock is not higher this year. While nearly 20% growth is nothing to sneeze at, you would think it would be higher? Amazon (NASDAQ:AMZN) is up over 70% for the year. Shares of the Argentinian e-commerce giant Mercadolibre (NASDAQ:MELI) are up 98% in 2020.

Alibaba is considered the “Amazon of China” but can’t get the same attention from investors. Perhaps some of that can be blamed on the novel coronavirus. In the first quarter of 2020, the company reported a 98% year-over-year decline in revenue. This stark number was the result of declining investment income.

That’s a reminder to investors that Alibaba recorded a large percentage of its recent profits from asset appreciation (i.e. the investments it has made in other companies). And that decline in investment income is a sore spot with investors who are crying foul at the company’s lack of transparency in their accounting measures.

The Bottom Line on BABA stock

Expect the company to post earnings and revenue that will divert the average investor’s attention away from the larger issues. The Chinese consumer is buying. The company’s cloud computing business is growing. Everything is great. Nothing else to see here.

But the United States is openly trying to make the Chinese financial system more transparent. And I suspect the pressure will remain on China regardless of who wins the election. This in turn could fuel the cry for delisting.

For now this is a circular argument. But that could change. With the attention of the U.S. government turning to the election, BABA stock has a short-term runway to grow under the radar. And with shares still undervalued, the earnings report may create your best buying opportunity for awhile.