After suffering a stunning decline in the latter half of 2018, shares of Alibaba Group Holdings Ltd. (BABA) have rebounded as investors are finding new reasons to be optimistic about the Chinese e-commerce giant’s growth prospects. Between mid-June of last year and early January of this year, the stock fell nearly 40%, around double the market rout suffered by the S&P 500 in the last half of the year. But the stock has since rebounded and is up nearly 30% since the start of the year. 

What It Means for Investors

Helping fuel the rebound is the belief among investors that Alibaba’s presence in China’s massive economy will help it to continue growing, even amid the ongoing trade war with the U.S. The ability to do that will largely depend on the company’s ability to cater to less affluent consumers in China’s more rural areas. The company is also looking to ramp up investing in the cloud-computing market and international expansion.

Key Takeaways

  • Stock is up 30% this year after falling 40% in latter half of 2018.
  • Faces headwinds of slowing Chinese economy and ongoing trade war.
  • Revenue and profit growth has picked up in first half of year.
  • Plans to expand consumer base to China’s less-developed cities.
  • Plans to invest in cloud-computing market.
  • Plans expand internationally.

The Decline

Amid heightened concerns of a slowing Chinese economy and a deteriorating trade relationship with the U.S., investors worried that these developments would hurt Alibaba’s growth dumped the stock in the latter half of last year. Those fears were confirmed somewhat when the company issued its quarterly earnings report for the three months that ended in December 2018. 

The company’s core retail-marketplace grew just 27% for the quarter compared to the year earlier period, marking the slowest pace of growth in three years. That news wasn’t a complete surprise as the company had cut its revenue guidance in October for the rest of the fiscal year through the end of March of 2019, according to the The Wall Street Journal.

Alibaba blamed the lower growth on China’s weakening economy, but there were other signs suggesting the e-commerce giant would face future struggles, including Beijing’s crackdown of shadow banking causing financing to dry up for vendors that sell their wares on Alibaba’s platforms. 

Add in the trade war and potential spillovers into the job market and consumer spending, and this toxic mix of downside risks was enough to send investors for the exit doors. The selloff may have been a bit overdone as investors were also frantically dumping other equities and only regained confidence in early January when they jumped back in to buy the dip.

The Comeback

But Alibaba’s comeback was not just another beneficiary of general investor sentiment, as the company reported robust quarterly earnings in the three-month period through to the end of March 2019. Total sales rose 51% for both the fourth quarter and fiscal year end, its core e-commerce business grew by the same amount compared with the same period a year ago, and its net income more than tripled, according to the Journal.

Adding more fuel to investor sentiment was Alibaba’s announcement to focus on growing its customer base in China’s less-developed cities, as its presence in the big, wealthy metropolises of Beijing, Shanghai and Shenzen, was reaching its limits. While the citizens of those cities are generally less affluent, Alibaba’s Executive Vice President, Joseph Tsai, said he expects 500 million of those citizens to increase their spending to about $7 trillion over the next decade.

More good news arrived in August when the company reported earnings for its first fiscal quarter of 2019 that ended in June. Sales increased by 42% and profit more than doubled. While the big news announced was that billionaire founder Jack Ma would be stepping down as chair and would be succeeded by Chief Executive Daniel Zhang, Alibaba also outlined a number of positive strategies for future growth. 

Future Goals and Challenges

The company reaffirmed its commitment to expand into less-developed parts of China, laid out plans to invest in cloud computing and expand internationally. The company also announced a $6 billion stock repurchase program over the next two years, according to the Journal.

More recently Alibaba has laid out even more ambitious plans. Over the next five years, the company plans to increase the number of annual active consumers from the current 730 million to more than one billion, and nearly doubling its 5.7 trillion yuan annual gross merchandise volume to over 10 trillion yuan. Those are just the near-term goals, according to Barron’s.

Over the long term, Alibaba wants to expand to over two billion global consumers by fiscal year 2036 and support more than 10 million firms on its platforms. That’s an ambitious plan, especially considering the ongoing trade conflict with the U.S. that many analysts think will not have a quick or easy solution.

Looking Ahead

Of course, while Alibaba’s strong sales and profit growth in the first part of the year have helped its stock climb back from 2018 lows, that stock is still 16% below its all-time closing high even as the S&P 500 is back within inches of its all-time highs. If China’s economy continues to slow, the company will face serious challenges expanding within China, and if the trade war escalates into a more serious conflict with the U.S., plans for international expansion will also face significant headwinds.