Alibaba (NYSE:BABA) has been in the bull mode since early October with BABA stock going from $161 to a high of $230.
The main driver, of course, was the Phase One agreement between China and the U.S. regarding the massive trade dispute. While the settlement was somewhat modest, Wall Street still was enthused because it looked like things were headed in the right direction.
But during the past week or so, BABA stock has come under pressure. This time it looks like this is due to the alarming coronavirus virus. Yes, there has been a broad-based sell-off, as seen with other large Chinese companies like JD.com (NASDAQ:JD), Trip.com Group (NASDAQ:TCOM) and Baidu (NASDAQ:BIDU).
The coronavirus virus is fairly new. In fact, startup BlueDot used AI (Artificial Intelligence) to analyze billions of pieces of data to determine the start of it in late December.
So far, there is little known about the virus, but scientists are starting to see some trends. For example, it appears to not be as deadly as SARS (which affected China in 2002 to 2003) but looks to spread quicker.
Regardless, the Chinese government is taking drastic actions to curb the virus. It has essentially put the city of Wuhan – which has about 11 million people – on lock-down. There have also been transportation restrictions placed on various other cities.
BABA Stock and the Virus
Has the drop in the price been enough? Or might there be further worsening? Well, I can understand where there may have been some panic selling. However, I still think BABA stock is likely to remain under lots of pressure.
One thing to keep in mind is that BABA has become a major part of the Chinese economy. For example, the company’s retail marketplaces have 693 million annual active customers and the mobile MAUs (Monthly Active Users) are 785 million. There is also an extensive logistics platform, which includes a sophisticated set of delivery systems.
In other words, it will be difficult for BABA stock to avoid the effect of economic headwinds. Actually, even before the outbreak of the coronavirus, China was already decelerating. The annual GDP growth last year was 6.1%, which was the lowest in three decades.
But unfortunately, the virus will only make things worse. The shutdowns of the cities come during the Lunar New Year, which is a time that has large amounts of sales. There will also be a significant disruption that will lead to anxiety – dampening consumer sentiment. It’s also important to note that consumer spending has increasingly become more dominant in the Chinese economy.
According to Mo Ji, who is the chief economist of Greater China AllianceBernstein:
“The current outbreak’s likely impact will range from a 0.8% cut to real GDP if the epidemic is controlled within three months, to a 1.9% cost to GDP if the epidemic lasts nine months. Most likely, the duration of the outbreak will be something in between. For at least another three to four months, China will have to fight not only the spread of the disease but also the damage it causes to economic growth. We currently anticipate a possible one percentage point cost to real GDP growth.”
This would definitely be a major hit – and will weigh on BABA stock.
Bottom Line
Mark Pacitti, who is the founder and managing director of Woozle Research, conducted interviews with more than 250 professionals and business people in Asia to gauge the impact of the coronavirus.
Based on this, he concludes: “Our research suggests high single-digit YOY percentage revenue declines for Alibaba for the calendar Q1-2020 trading period. Weaker consumer sentiment and public caution is already negatively impacting trading results in January 2020 versus January 2019.”
Of course, this is not definitive. It’s just one survey. But then again, it seems inevitable that China’s economy will see continued weakness — and BABA will certainly feel the impact.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.