How to Profit From the Demise of 'China's Amazon'

by Andrew Zatlin March 31, 2023 12:00 pm ET

Alibaba – the "Amazon of China" – is being split up on instruction from the Chinese government.

Now all of the talking heads are advising investors to buy, buy, buy!

Should we follow their advice? Heck no – I've got a better idea.

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

How to Profit From the Demise of 'China's Amazon'

Picture this:

Joe Biden wakes up Monday morning, marches into the Oval Office, and demands to speak with Elon Musk.

"Musky," he says, "I am sick and tired of listening to you. You're too powerful. Tesla, Starlink, SpaceX – all of your enterprises are now on their own. Good luck."

That'd be a great story – our president essentially telling one of the world's most powerful people (some might say even more powerful than Biden) to kick rocks, simply because he's captured too much control.

Of course, that's just a story. After all, Biden doesn't have the stomach for something like that. But interestingly, this exact scenario played out in China with the country's largest company.

Let me explain why this story has made global headlines and reveal what the mainstream media isn't telling you about it...

We Need to Break Up

You might already be familiar with Alibaba (BABA). But in case you aren't, think of it as China's version of Amazon (AMZN).

This company does a quarter-trillion dollars of business each year. And like Amazon, it has stakes in e-commerce, delivery, cloud computing, and even entertainment.

In short, it's the biggest company in China – or at least it was.

Earlier this week, China announced it's breaking up Alibaba into six smaller companies. What's going on here?

Too Much Power

To answer that, let's start by looking at Alibaba's roots. This company got its start thanks to key investments from the founder of Yahoo!, SoftBank CEO Masayoshi Son, and – wait for it – the Chinese government!

Alibaba's success was massive. It grew and grew, creating enormous wealth for individuals in China, and increased power within the Chinese government. Its founder, Jack Ma, became the fifth richest person in the world.

But over time, Ma became too powerful. He became too influential. And when he criticized the Chinese government, the future of his company was clear...

Game Over

Ma thought he was immune from discipline. But the Chinese government essentially made him disappear. And now it's taking his company and breaking it up.

Essentially, this is the Chinese government reminding the world not to mess with it. It's not worth challenging this government to a fight.

Now, from an investment standpoint, there's a lot to consider. After all, Alibaba trades on the New York Stock Exchange. And you'll likely hear in the mainstream media calls to invest in either Alibaba or its upcoming collection of smaller companies.

Why so bullish? For one, Alibaba might soon be trading at a discount – a welcome sight for all investors. For another, some analysts forecast that once broken into six divisions, each one will have the chance to grow into a massive success, just like the collective Alibaba. In other words, you might be able to get in on the ground floor of the next six Alibabas!

But I'm here to warn you...

Invest in Alibaba? Not So Fast...

There are a couple of reasons why you should think twice before jumping into Alibaba.

First, you don't know exactly what it is you're investing in.

Chinese companies don't get audited the same way U.S. ones do. And as a result, there's been a lot of snake oil and fraud instances coming out of China-based businesses.

For example, Luckin Coffee (LKNCY), the Starbucks (SBUX) equivalent in China, went bankrupt after adding $310 million in fake revenue to its books. And Kingold (KGJI), a Chinese jewelry company, raised $3 billion using its gold assets as collateral. Except the gold never existed – the company had copper bars covered in gold wrapping.

Granted, Alibaba is not some "fly by night" company. But still, the concern over what this company is actually hiding, or what the six smaller divisions will actually hold, is legitimate.

As for the second reason, Alibaba is being taken down a few notches with this move. And that means it could lose a lot of preferential treatment it's received over the years.

It's been awarded a lot of cloud-computing contracts from the Chinese government. But post-breakup, those contracts – and in fact, a lot of other business – could go to its competitors...

And it's those companies that I want to focus on.

Two Ideas Plus a 'Pro' Pick

Consider Huawei, for example. This Chinese technology and manufacturing company could be in great position to capture some of Alibaba's lost business. Maybe even Amazon here in the U.S. scoops up some of Alibaba's customers.

Of course, a company like Amazon is already a trillion-dollar enterprise. It would take a lot of extra business for its stock price to move significantly.

However, there's a lesser-known company whose stock could skyrocket amid the Alibaba fallout. It's on the right side of the U.S.-China trade war and stands to benefit from increased activity at both Huawei and Amazon.

Curious what company I'm talking about? Make sure you're a Moneyball Pro subscriber to get all the details.

We're in it to win it. Zatlin out.