Forget Alibaba, Buy These 5 Chinese Stocks Instead For 2019
Zacks Investment Research | Dec 26, 2018 08:26PM ET
Trade wars are considered headwinds for companies as these erode profit margins and affect the overall economy. Thus, the rising trade war between the United States and China has impacted Alibaba Group Holding Limited (NYSE:BABA) .
Despite Alibaba’s strong first half of 2018, the China-based e-commerce giant was fettered by this trade war, in turn increasing expenses and slowing economy in the second half of 2018.
Alibaba’s stock has risen more than 100% over the past three years. But unfortunately, this U.S.-China trade war has taken a toll on Alibaba, hitting its share price largely.
This Zacks Rank #3 (Hold) stock has been lagging the S&P 500 Index and the industry it belongs to over the past year.
Shares of Alibaba have plunged 22.5% on a year-to-date basis compared with the S&P 500’s decline of 12% and the broader sector’s fall of 13.9%.
What’s Giving Alibaba a Tough Time?
Revenues, which had been expanding over the past three years, continued its momentum in the first half of 2018 but started their downward journey in later half of 2018. The bottom line also remained under pressure in 2018.
Lackluster results were an outcome of the company’s heavy spending in new areas of core online retail business, with investments in supermarkets, stores, new artificial intelligence, digital entertainment, along with cloud computing businesses. Not only this, Alibaba’s expansion efforts outside China also remain a major culprit behind its dip in profitability.
China's biggest e-commerce firm warned that profits will continue to be impacted by investments in new businesses, partly due to the consolidation of Koubei and expenses related to its newly-created local services unit.
Moreover, U.S.-China trade tensions and other political worries have continued to weigh on Alibaba's domestic as well as international growth, and have caused the company's shares to retreat so far this year.
In addition to all these, Alibaba cuts a sorry figure on the earnings front as well. In the past 60 days, six analysts have downwardly revised earnings estimates for fiscal 2019. As a result, the Zacks Consensus Estimate has moved south to stand at $5.20.
Given the headwinds faced by the company, we believe that the stock will remain under pressure in the coming quarters as well.
Will the Stock Regain Momentum?
Although results show that increased spending on a number of growth initiatives on retail and cloud computing taken by management are slowly taking off, we must wait and see the positive effects of the same in the underwriting results.
Alibaba’s cloud computing has significant growth opportunities, driven by robust product portfolio, strengthening IoT capabilities and key offerings. Given the growing position of the company’s cloud business in China and aggressive international expansion strategies, we believe that cloud computing will be one of the major growth drivers in the long run.
The online giant is also well poised to benefit from the growing demand for videos across its platform. The company has been flexing its video content muscles with numerous licensing deals. These deals are another sign that Alibaba is willing to spend plenty of cash on its entertainment and media units, which management has identified as key growth drivers outside of core e-commerce business.
Coming to the numbers, Alibaba's cloud business grew 90% year over year to 5.67 billion RMB ($825 million), and media and entertainment was up 24% to 5.94 billion RMB ($865 million)in the last reported quarter.
While these measures seem impressive, the same may take a while before they start paying off completely. Hence,it is advisable to steer clear of Alibaba as of now.
Our Picks
Though Alibaba's prospects may not appear appealing at the moment, we have highlighted five Chinese stocks that hold promise for investors. All these stocks sport a Zacks Rank #1 (Strong Buy). You can see Original post
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