Alibaba Group Holding Limited’s (BABA) market share shrinks in the face of increasing competition

We recently published a list of The 10 best foreign stocks to buy nowIn this article, we'll take a look at how Alibaba Group Holding Limited (NYSE:BABA) stacks up against the other best foreign stocks to buy now.

The end of 2024 is ushering in a much-needed paradigm shift for U.S. and global equities. Ever since the coronavirus pandemic disrupted our way of life in 2020, investors have had to deal with one setback or another. While the immediate impact of the pandemic caused tech stocks to surge, other sectors like energy and travel did not. Then inflation rose in 2022, forcing central banks around the world to rapidly raise interest rates, which of course made equities much less attractive than before.

Since then, interest rates have been high in Europe and the US, as well as in developing countries. However, with the recent interest rate cut decision by the European Central Bank (ECB) and the Bank of England (BOE), things seem to be changing. The ECB got the ball rolling in June when it cut rates by 25 basis points and followed up with a further 25 point cut in September. These decisions were influenced to some extent by concerns about economic growth. During the press conference following the announcement of the rate cuts, ECB President Christine Lagarde stated that her organization had initially expected a revival in European economic growth, but this has not been the case.

Lagarde: “We have revised our growth forecast downwards because consumption, which we had previously expected – essentially because net income has started to rise, inflation has come down significantly and we had expected consumption to increase – has not picked up. And I think we will keep a close eye on that when we publish our next growth and GDP figures.” In the second quarter of 2024, EU and euro area GDP grew by 0.3% overall, similar to the first quarter figures. On an annual basis, EU GDP grew by 0.8%, while euro area growth was 0.6%. Lagarde's comments were accompanied by the ECB's updated growth estimates for 2024, 2025 and 2026. While these were expected to be 0.9%, 1.4% and 1.6% respectively, they were all cut by 0.1 percentage points in the updated estimates.

Given the economic performance of the EU, a country's underperformance is relevant to the wider field as well as to an analysis of foreign or non-US economies. That country is Europe's largest economy, Germany. The German economy was the worst performing among major economies in 2023, contracting 0.3%. In the second quarter, GDP contracted 0.1% sequentially, missing analysts' estimates of 0.1%. This slowdown came at a time when inflation rose 2.6% in July, accelerating 0.1 percentage points from June. Economic uncertainty has also affected German investors, as data from the economic research institute ZEW's economic sentiment index shows that the index fell to a whopping 3.6 points from 19.2 points previously. Analysts had expected a reading of 17 points. In addition, investors' economic perception fell to a level last seen when the coronavirus began to wreak havoc in May 2020, at -84.5.

The story continues

Germany is struggling because the fallout from Russia's invasion of Ukraine has affected supplies of cheap Russian gas. While this has increased costs, on the demand side, Germany is suffering from a weak Chinese economy. Data from the Federal Statistical Office shows that German exports to China stood at €7.5 billion in May, down 14% year-on-year. Between January and May, exports totaled €40.3 billion, down over 10% from 2022. With German companies like LVMH reporting a 14% drop in sales in China in the second quarter and Swatch reporting a 30% drop in the first half, it's clear that Chinese consumers are not in the mood for discretionary spending.

This has also led Goldman to recommend that investors sell European stocks with China exposure due to concerns about its basket of European equities. According to the bank, “we have already seen many earnings downgrades for our luxury basket so far this year, but we fear there could be more.” It adds: “In addition, the basket's valuation premium has declined but remains on the high side of its historical trajectory.”

Pessimism about China is also evident in the data. In the second quarter, the economy grew by 4.7%, with retail sales growing by just 2%. This was the lowest since December 2022, when zero-COVID lockdowns across the country were still taking effect. Following the disappointing data from the world's second-largest economy, Goldman and Citi, which had previously expected China's economy to grow by 4.9% and 4.8% respectively, cut their estimates to 4.7%. Goldman commented, “We believe the risk of China missing its full-year GDP growth target of 'around 5%' is increasing, and therefore the urgency of further demand-side easing is also increasing,” while Citi stated, “We believe fiscal policy needs to be strengthened to break the austerity trap and deploy timely growth support.”

Yet while Germany and China struggle, the world's largest economy, America, is thriving. US GDP grew 3.1% annually in the second quarter, lending credence to the argument of American exceptionalism. On a quarterly basis, it is up 0.7%, even though interest rates remain at a 24-year high. This growth has given the Federal Reserve ample room to keep interest rates high, and now most expect a rate cut to be imminent. Because of America's dominant role in the global economy, the Fed's decisions have global implications. For European equities, this meant that the index tracking Europe's 600 largest stocks rose 0.5% the day before the rate cut decision, while the UK stock market rose 0.7%.

Our methodology

To create our list of the best foreign stocks to buy, we ranked the 40 most valuable stocks outside the U.S. by market capitalization based on the number of hedge funds that bought their shares in the second quarter of 2024. From this, the best stocks were selected, making sure to exclude stocks that were founded in America but have their headquarters in Ireland or other countries.

Why do we care about the stocks hedge funds invest in? The reason is simple: Our research shows that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (See more details here.)

An e-commerce platform that presents a wide range of products to customers online.

Alibaba Group Holding Limited (NYSE:BABA)

Number of hedge fund holders in Q2 2024: 91

Alibaba Group Holding Limited (NYSE:BABA) is a Chinese e-commerce and cloud computing giant. The company is responsible for at least 40% of goods shipments in China and benefits from a wide moat, a large customer base, and trading partnerships that are difficult to undermine regardless of the prevailing economic situation. In addition, Alibaba Group Holding Limited (NYSE:BABA) is one of China's largest cloud computing companies, giving the company a high-margin business with recurring revenue. Cloud computing can become one of the biggest beneficiaries of the rise in AI demand, allowing Alibaba Group Holding Limited (NYSE:BABA) to use its cloud business as a solid base to address AI demand. However, the rise of Chinese e-commerce companies like PDD has led to market share losses for the company, as its e-commerce market share was 75% in 2015. Alibaba Group Holding Limited's (NYSE:BABA) 2026 earnings forecast of $9.91 gives it a P/E ratio of 8.61, reflecting investor concerns about Chinese stocks and considerably lower than Alibaba Group Holding Limited's (NYSE:BABA) American peers.

O'keefe Stevens Advisory mentioned Alibaba Group Holding Limited (NYSE:BABA) in its Q2 2024 investor letter. Here's what the company said:

Total BABA 2nd place on our list of the best foreign stocks to buy now. While we recognize BABA's potential as an investment, we believe some AI stocks promise higher returns and do so in a shorter time frame. If you're looking for an AI stock that's more promising than BABA but trades at less than 5 times its earnings, read our report on the cheapest AI stock.

READ MORE: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley And According to Jim Cramer, NVIDIA has “become a wasteland”.

Disclosure: None. This article was originally published on Insider Monkey.