American Investors Must Not Fear Investing In Alibaba Group Holding Ltd Stock

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Alibaba stock is trading near its 52-week high and could climb to new highs even if the company is fined by the SEC for accounting violations, noted Seeking Alpha contributor Wayne Duggan. The Chinese retailer’s stock is still at bargain prices and last week broke above $100/share for the first time since January 2010.

Alibaba is underperforming despite growth

Several reports have compared the Chinese e-commerce company to Amazon. Currently Amazon leads the U.S. market in e-commerce and is also gaining a stronghold in cloud services. On the other hand, Goldman Sachs recently explained that Alibaba is the leading e-commerce firm in China, and its cloud services have been growing rapidly — faster than those of its competitors.

However, there are differences between the two online retail giants and how they control their finances. Alibaba has registered year-over-year revenue growth of 27%, 26%, 33% and 48% in the last four quarters. The growth is not only large, but it continues to accelerate as well, Duggan says. Meanwhile Amazon’s revenue growth was reported to be 23% 22%, 28% and 31% in the last four quarters respectively.

But since 2015, Amazon shares are up 155%, while Alibaba shares are up just 0.1%, the report notes. The Chinese firm’s underperformance has been caused by three factors, according to Duggan.

No need to worry

The first is that many American investors do not trust China, as fears of an economic collapse there have threatened the market in the past two years. According to American Enterprise Institute scholar Derek Scissors, American investors are wary of China’s debt levels, which have reached 250% of GDP. But China’s instability is different from that of other countries as it is “linked to the fact that we have essentially market-driven financial systems, and that’s just not the case in China,” says Scissors, who added that China is far from economic collapse.

Another factor is Alibaba’s financial structure. The e-commerce company is structured as a “variable-interest entity,” which means shareholders do not own a direct interest in the China-based company. The investors instead own an interest in a Cayman Islands company which holds a contract with Alibaba to receive royalties and fees based on its earnings. This may appear suspicious to U.S. investors, but this financial structure is something that Chinese regulators want all Chinese firms which want to list overseas to follow, notes Duggan.

The last factor is its accounting practices. The SEC declared in May that it is investigating the retailer for its accounting practices to find out if it has violated federal laws. Investors may fear the investigation, but Alibaba chairman Jack Ma sees it as an opportunity “for us to let them understand what we’re doing.”

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