Chinese internet stocks may seem like the last place to invest considering the exposure they have to the U.S./China trade war. Stocks like Baidu were among the worst performers in the stock market, shaving 7 percent off its value and weighing on the Nasdaq in the process. Jack Ma’s e-commerce giant Alibaba shed nearly 5 percent. To say that these names are risky is an understatement, given not only the escalation of tariffs but also because of the influence of the Chinese government over these companies. Consider the issues that Tencent had publishing new video games last year on the heels of a regulatory freeze that was only lifted in early 2019.
Nonetheless, as investors await a flood of analyst reports with stock downgrades after today’s debacle, one Wall Street firm says now’s the time to buy Chinese internet stocks. According to CNBC, Jefferies has attached a buy rating to Alibaba’s stock, despite the economic slowdown that China is suffering from.
Alibaba is currently trading at $153, and Jefferies analysts believe that the stock has more room to run, suggesting that it is worth more than $216 and saying it has “huge potential.” In fact, Alibaba has been making strides to diversify its revenue streams, as evidenced by its recent commitment to support U.S.-based businesses. Alibaba Co-Founder Jack Ma believes that the platform is a solution for U.S. businesses to the U.S./China trade war, not a hindrance. Alibaba is also pursuing a Hong Kong stock market listing, which could bolster the hype surrounding the stock.
But Alibaba is a volatile stock, one that has shed one-fifth of its value in the last three months. One of the issues that investors have to contend with is the severe outflows that are shaking the Chinese equity markets. In April and May, the Chinese stock market reportedly suffered $12 billion in outflows, which is the worst its seen in memorable history, as a result of trade war fears. So even if Alibaba or another Chinese internet play justifies a higher valuation, investors are likely to be swept up in the selling that is taking place in the broader Chinese equity market.
Emerging market stocks may have their place in an investment portfolio, but Chinese internet stocks including Alibaba appear very risky for the foreseeable future as long as this trade war drags on, the Jefferies report notwithstanding.
Disclaimer: This article is intended for informational purposes only and should not be taken as investment advice.