Speculation that a US-China trade war dooms Alibaba Holdings (NYSE: BABA) is rife these day.
Surprisingly, Jack Ma himself is fueling these rumors with his retirement and rash statements about a trade war. Ma told investors he thinks the trade war will last 20 years on 19 September 2018.
Revealingly, Ma offered no evidence to back up his thesis. Fortune reports he merely speculated that containing Chinese economic growth is America’s long-term economic strategy.
Will there be a 20 Year Trade War?
All Ma is displaying here his is ignorance of American politics. American presidents serve four-year terms; therefore a 20-year United States Masterplan is far-fetched.
A more likely scenario is that Ma directed his speech at Chinese audiences. A 20 year Masterplan sounds more likely something that will come out of the Chinese Communist Party.
I suspect Ma is trying to get China wage to wage a 20 year trade war against the United States. Ma is also showing his anti-Americanism to nationalist elements in China.
I think it is Chinese President Xi Jinping, not Trump who is preparing for the 20 year trade war. Ma was unveiling a new Chinese policy; or demonstrating his support for Xi’s policy, not accurately forecasting events in the United States.
A strong possibility here is that the 20 year trade war is the new party line in Beijing. Under those circumstances, Ma has to go along if he wants to stay out of prison.
Can Alibaba Survive a 20 Year Trade War?
The question of who launches the trade war will be irrelevant once it is reality. The only relevant question for investors is can Alibaba make money during a trade war.
I conclude that Alibaba could not survive such a trade war because it reported annual revenues of just $39.592 billion on 31 March 2018. On the other hand, Alibaba’s most prominent competitor Amazon (NASDAQ: AMZN) reported annual revenues of $177.9 billion for 2017.
America’s largest retailer Walmart is on track to make $500.34 billion in revenue in 2018, I noted elsewhere. Statista calculates that Walmart generated revenues of $485.97 billion in 2017 and will generate $500.34 billion in 2018.
Therefore, Alibaba is not in Walmart and Amazon’s league which makes it very vulnerable to a trade war. Ma claims the trade war has damaged Alibaba’s business but presented no evidence to verify that claim.
Moreover, Alibaba’s revenues indicate that China might not have the resources to wage trade war. If that is the case, investors need to question Ma’s statements.
Can Alibaba Make Money During a Trade War?
Gauging the “trade war’s” effects on Alibaba is difficult because the latest numbers I found for Alibaba were from March 31, 2018. Obviously, those numbers reflect conditions before U.S. President Donald J. Trump (R-New York) supposedly launched the “trade war.”
Alibaba was definitely making money before the trade war. It reported annual gross profit of $22.658 billion, an operating income of $10.966 billion, and a net income of $10.320 billion on March 30, 2018. Unfortunately, it is unclear how much of that money Alibaba made in the USA.
Alibaba reported a very healthy free cash flow of $15.082 billion, a financing cash flow of $3.22 billion and an operating cash flow of $19.802 billion on 31 March 2018. Correspondingly, Alibaba reported having $31.531 billion in cash and equivalents and $1.725 billion in short-term investments on the same day.
Therefore, Alibaba had around $33.256 billion in the bank on 31 March 2018. Obviously, Alibaba has the resources to survive a short-term trade war. The danger is a long trade war, especially one that forces American companies to develop new sources of supply in other countries.
Interestingly, Amazon and Walmart; which depend on cheap consumer goods from China, might be more vulnerable to that trade. Consequently, another possibility is that Ma (and his boss Xi) is trying to scare Amazon and Walmart into pressuring Trump to end the “trade war.”
Is the Trade War for Real?
A smart strategy for Amazon and Walmart will be to simply ignore both Trump and Xi. The retailers should ignore Trump and Xi because the trade war might be a scam.
Trump will not risk his reelection; or Republican Congressional seats, by raising consumer prices. Xi will not lose the main market for Chinese manufactured goods by triggering a trade war.
A possibility that all investors need to consider is that Trump, Xi, and possibly Ma are putting on a show for the media. Their conflict might be a “work” one of the acts professional wrestlers put on to generate audience interest. Most wrestling works involve creating a fake conflict to add drama to a match.
Remember, Trump has had some experience with wrestling; he appeared in WWE about a decade ago. The Donald even had a fake match involving Vince McMahon and Stone Cold Steve Austin. For this reason, I think the “trade war” is fake news.
The best strategy for investors here is to wait and see. I recommend that you hold your retail stocks until evidence that the trade war is fake or real appears.
Is the Trade War Fake News?
Conversely, investors should stay away from Alibaba (NYSE: BABA) right now. I think Mr Market overvalued it at $164.16 on 24 September 2018. Walmart stock was a far better buy at $95.92 on the same day.
The trade war stories are yet another reason investors; and everybody else, needs to view everything in the media says about trade with skepticism. Ma’s performance demonstrates that many of the corporate events you see are fake news designed to generate sensational headlines. The media goes along because fake news generates hits to websites and sell advertisements.
Investors should not worry about a “trade war” until one begins. Investors should view all news stories with skepticism. Especially those involving masters of fake news like Donald J. Trump (R-New York).