Spoiler alert: Alibaba (NYSE:BABA) is a better bet on a Chinese market recovery than Tencent (TCEHY).
But why? Both are strong stocks long term. In five years, BABA and TCEHY are up 86% and 190% respectively. Compare that to the S&P 500 is only up 40% for the same period.
BABA Earnings
This morning BABA easily beat their earnings forecast and proved that BABA is still a growth stock. They delivered sales 51% higher than last year. This is a tremendous achievement for a 20-year-old company.
The results were just as impressive on the bottom line as well. So traders bought up the stock as a knee-jerk reaction to the results. But it faded a bit, perhaps on less than enthusiastic guidance and a struggling stock market in general. But I think the lower guidance is management being cautious while the tariff war persists.
Regardless of what management promises now, naysayers cannot discount the strength of the quarter they just reported. This is a company on rails and a small dip in the pre-open is not a reason to sell the stock. Long term, if the markets are higher, Alibaba stock will be too.
While 2019 has been strong so far, equities are back to struggling with headlines from the U.S. China trade war. This is an ongoing issue that we thought we were days from putting to rest only to find out that we took a major step backwards.
The next milestone on that front is not until late June when president Trump and Xi could negotiate face to face during the G-20 meetings. Meanwhile, BABA and TCEHY stocks will suffer the short-term difficulties that come from these uncertainties.
BABA vs. TCEHY
So how do we chose between two strong Chinese stocks when both stocks are superstars in the long term?
The 5-year stock performance metrics suggest that Tencent is the better one to own. But BABA stock is stronger for the last two years. So I choose BABA because it’s the one with the better momentum now. Also, BABA’s earnings showed that growth is still the plan and that their efforts are targeting the right segments including Alipay and the Cloud.
Fundamentally, BABA sells at a 45 trailing P/E ratio which is expensive when you compare to Apple (NASDAQ:AAPL) but it’s not bloated versus the other momentum stocks including TCEHY. As long as BABA delivers this great growth I can give it a pass on profitability. They need to spend a lot to feed the growth.
Wall Street agrees with me since year-to-date BABA stock came into the earnings up 27% which is about 40% better than TCEHY for the same period. This is also true for the last two years.
Although they have similar opportunities, Alibaba is the one with more transparency. TCEHY had regulatory difficulties so their earnings report was disappointing. Sales growth was weak and earnings grew almost three times less than BABA’s.
Regardless of the reason, the absolute results clearly support that BABA is the better bet for the next few years. They are in areas that are global trends and not likely to face singular challenges.
In the long run both, Alibaba and Tencent stocks will be higher. These are strong companies with proven managements and they will be able to overcome the challenges. BABA’s management today even stated that they can benefit from the trade talks. This is confidence that inspires stock ownership. This is why BABA is the one that has the wind in its sails.
Technically, their long term chart technicals are similar they are both just above support so the bulls have solid platforms from which they can mount upside efforts.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
