China is on the road to recovery from the spread of the novel coronavirus. Some of the hardest-hit China-based investments, including Alibaba (NYSE:BABA) stock, are also in recovery mode. From a March 23 low, the shares had gained more than 32% heading into the May 21 earnings report.
There was a great deal of speculation and anxiety surrounding the buildup to Alibaba’s earnings release for the company’s fourth quarter of fiscal-year 2020. Alibaba stock shares took a hit after the data was announced to the public. But was the sell-off justified?
It’s likely that fearful Alibaba stock traders were concerned about renewed tensions between the United States and China. This is an on-again, off-again issue that may persist for a while. If we take a close look at Alibaba specifically, though, we can be confident that the company and the stock will survive the turmoil.
It would take a dedicated conspiracy theorist to believe that the uptick in Sino-U.S. tensions was purposely timed to coincide with Alibaba’s earnings-data release.
That being said, the timing of the passage of one particular bill in the U.S. Senate was rather unfortunate for Alibaba. It probably wasn’t intended to rain on the firm’s earnings parade, but it did put a damper on the positive earnings surprise.
The bill threatens to delist some Chinese companies from major U.S. stock exchanges. Since the bill was passed in the Senate, the next step would be consideration in the House of Representatives.
All of this might seem unfair to Alibaba because the bill was evidently prompted by a completely different company. After Luckin Coffee (NASDAQ:LK) reportedly fabricated its sales figures, some folks on Capitol Hill sought to tighten regulations.
So, Alibaba stock investors will just have to accept the fact that there’s international tension and it may persist for a while. It’s not a company-specific problem and it doesn’t reflect on Alibaba’s fiscal health. The single-day stock decline, therefore, needn’t discourage the shareholders.
Because of the spread of the coronavirus, consumer habits and preferences have changed dramatically. The trend toward increased online shopping has benefited Alibaba, and the recently reported earnings data reflects this.
To begin with, Alibaba’s gross merchandise volume surpassed the $1 trillion milestone. This is most likely the result of merchants migrating to Alibaba’s digital sales platform amid shelter-in-place mandates.
China is recovering from the coronavirus crisis and attempting to reopen its economy. Nonetheless, merchants’ and shoppers’ move to online platforms like Alibaba should benefit the company for a while. More people and businesses have discovered and adapted to e-commerce, and that works in Alibaba’s favor.
Plus, there was another positive surprise for Alibaba investors. Revenue for the company’s cloud business increased year-over-year by a whopping 58%. Not everyone thinks of Alibaba as a serious cloud-space contender, but this segment of the company’s business is worth watching.
Overall, it was a strong quarter for Alibaba financially. For instance, the analyst community had expected $2.4 billion in quarterly adjusted net income. The actual result came in at a significantly higher $3.1 billion.
Even with the encouraging numbers, Alibaba CEO Daniel Zhang admitted that the company faces “uncertainties.” Zhang alluded to shifting consumer preferences which the company will need to adapt to. For example, Zhang observed that “When ladies wear facemasks, the need for makeup is getting lower.” On the other hand, the demand for skin-care products remains “very strong,” according to Zhang.
Is this a real problem for Alibaba’s business model? Not necessarily. It’s mostly a matter of the company’s ability to change with the times. And since Alibaba remains in a strong fiscal position, the company should be able to handle the “uncertainties” that the e-commerce world is facing.
The Takeaway on Alibaba Stock
All businesses have to face poorly timed regulatory events and shifts in the commercial landscape. Alibaba stockholders can nonetheless hold on to their shares and remain confident in the company’s adaptability and solid financial footing.
David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular YouTube financial channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.