Jack Ma’s Departure Will Reveal the True Foundations of Alibaba Stock

Will Healy

Updated Mon, Sep 17, 2018, 11:35 PM

I have written mostly negative articles about BABA stock in the past. That said, starting a company in one’s apartment and turning it into a $400 billion-plus operation stands as an impressive feat by any measure. Also, by announcing his plans one year in advance and naming his successor, Mr. Ma chose to handle this transition in the smoothest way possible.

However, as I mentioned in a previous article, Ma might have built the GE (NYSE:GE) of China. And like General Electric when it was run by a different Jack, one must wonder if anybody besides Ma can maintain Alibaba in its current form?

Alternatively, does Alibaba become a company like Microsoft (NASDAQ:MSFT) that can adapt to the changing business environment? Investors will not know the answer to that question for some time. Even with Microsoft, we did not know how it would perform without Bill Gates until a new generation of leadership took over. Daniel Zhang, Mr. Ma’s successor, will have to prove himself in the same manner.

Competition in Asia Will Become Mr. Zhang’s First Test

Still, Mr. Ma will remain with the company for another year. Judging by the recent focus, Mr. Zhang’s first test will involve competition in Asia.

Unlike most Chinese companies, Alibaba actively competes outside of China. With a move into other parts of Asia, it is seeing its business model tested. Its largest non-Chinese peer, Amazon (NASDAQ:AMZN) has traditionally built its own infrastructure. For most of its history, Alibaba acted as a middleman with little infrastructure or product of its own. Still, competition from JD (NASDAQ:JD), which takes a more Amazon-like approach, has forced BABA to build more of its own infrastructure within China.

Now, Amazon and Alibaba will face off directly in Southeast and South Asia, and both retail philosophies will be tested. Also, one cannot forget that JD has also expanded into other parts of Asia. And now that Walmart (NYSE:WMT) purchased Flipkart, an Indian e-commerce company, competition between the four in Asia will become intense. If Alibaba succeeds in these markets under Mr. Zhang’s leadership, that will probably rebuild the bull case for BABA stock.

Some might be tempted to buy BABA stock now, despite the anxieties. It trades at 28 times forward earnings. Also, Wall Street predicts Alibaba’s profits will grow by 18.3% this year and 35% next year. Despite these numbers, I recommend staying away. Besides the leadership transition issues, one must remember that JD offers higher growth with only a slightly higher earnings multiple. While I would choose BABA stock over Amazon, I think too much uncertainty remains at these levels.

The Bottom Line on BABA Stock

Mr. Ma’s departure will reveal the true nature of Alibaba and, by extension BABA stock, to the public. As Bill Gates chose to do before him, Mr. Ma will leave his company to focus on philanthropy. Whatever happens, we will now find out the true nature of Alibaba. Will it remain a force in retail and other endeavors for decades to come? Or will it show itself as unmanageable by anyone besides Mr. Ma? Only time will answer that question.