Alibaba stock is down another 2.9% this week after a report from Barron's indicated the e-commerce stock could fall another 50%.
Alibaba Group Holding Ltd. (NYSE: BABA) shares hit a high of $120 in the two months following the company's September 2014 IPO. But Barron's issued an Alibaba stock price prediction that sees BABA slipping from its current price near $63 all the way down to nearly $30 per share.
Barron's cites Chinese economic struggles, increased e-commerce competition, and the company's unique corporate governance as reasons the stock will continue to fall.
"It's time to get real," the article said. "A decline of up to 50% looks far more likely. Alibaba shares trade at about 25 times the consensus earnings estimate for the year ahead, and that should be closer to eBay's multiple of 15."
But according to Money Morning experts, the Barron's article got it wrong.
"I have great respect for Barron's," Money Morning Executive Editor Bill Patalon said. "It's a great publication and has a contrarian bend just like me. But nobody's perfect and, in this case, the writer got it wrong."
Here are two reasons why Patalon says the damaging report is off base...
According to Patalon, the Barron's report doesn't address the right time frame. Pullbacks like this are very common for new issue stocks.
"I knew that, as a hot IPO, there was every chance the stock could - and probably would - sell off," Patalon said. "It's a 'transformational' type of company, meaning its leaders are 'planting seeds' right now that will have big future payoffs."
You can't look at Alibaba stock with a short-term perspective. This is a company that is building for the long-haul. Jack Ma isn't overly concerned with quarter-by-quarter data.
"Alibaba's moves into entertainment, media, cloud computing - these are all part of a broad vision Jack Ma and his executive team has for Alibaba," Patalon said.
Patalon says the article is also wrong when it compares Alibaba to eBay Inc. (Nasdaq: EBAY).
"EBay is a bad comparison," Patalon said. "It's a long-established company, in a mature sector, and doesn't have any real 'growth engine' to drive it into new markets or supercharge its revenue and earnings growth."
Patalon instead compares Alibaba stock to Amazon.com Inc. (Nasdaq: AMZN) stock.
"Amazon issued its first shares on May 15, 1997, at a split-adjusted price of $1.50 a share," he continued. "Amazon had an unusual game plan - its execs said the company wouldn't make money for four or even five years."
Amazon shares climbed over $100 in December 1999. Then, when the tech bubble burst, Amazon shares sold off. But by no means did the company go under. It had a solid business and a firm long-term vision. Now, every share purchased for $1.50 is worth $527.
And Alibaba stock has the opportunity to deliver similar wealth to investors. Patalon even describes BABA stock as a "legacy wealth" play...
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One of the reasons to be bullish on Alibaba stock is the company's strong revenue growth. Barron's points out that over the past three years, Alibaba's revenue has grown by an average of 56% annually. Major Internet competitors Facebook Inc. (Nasdaq: FB), Amazon, and Google Inc. (Nasdaq: GOOG) all trail BABA with average annual growth of 49%, 23%, and 20%, respectively.
For Alibaba stock, a drop in the near term is not a reason to panic. Revenue growth like that shows how popular the company is in China. And even if the economy is slowing, the Internet industry is growing.
A study by the China Internet Network Information Center (CNNIC) determined the number of Internet users in the country will hit 800 million by 2016 or sooner. By comparison, the entire current population of the United States is just 319 million.
Patalon recommends adding to your position every time there is a major pullback in Alibaba stock. He calls Alibaba a "spare-change stock" and says investors would be wise to accumulate small chunks of shares every time they have some extra cash or "spare change."
Money Morning Chief Investment Strategist Keith Fitz-Gerald agrees that the Barron's report missed the mark.
"I do think the Barron's article is incorrect," Fitz-Gerald said Monday. "I've spent a lot of time on the ground in China, and I think the Chinese consumer is ferocious on a level that mercantile can't contemplate. And I think that Alibaba still has a lot going for it. If it falls 50%, I think it's time to back up the truck and buy. I hope I get that chance."
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