Cathie Wood Sold $54 Million of Alibaba Stock in a Single Day. Is Alibaba a Sell?

Since mid-May, Cathie Wood's Ark Invest has liquidated almost all of its position in Alibaba Group (NYSE: BABA). That included a $54 million sale of the Chinese e-commerce and artificial intelligence (AI) stock in a single day in late June.

Wood, who is both the CEO and the public face of the company, has not publicly commented on this move, which some investors may treat as a sell signal in itself. Nonetheless, investors should probably look more closely at Alibaba's fundamentals and business environment before making such a decision on the consumer discretionary stock.

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A sudden reversal

Alibaba stock has lost approximately half of its value since it reached its 52-week peak in October. At that time, Ark Invest owned around 99,000 shares of Alibaba.

As the stock began to correct in November, Wood increased her position in it. However, she began selling the stock aggressively at the beginning of June, and as of the time of this writing, she has sold nearly all of Ark Invest's Alibaba stock.

The first round of bad news came from its May 13 earnings report. Its loss of 848 million yuan ($123 million) stood in stark contrast to the profit of 28.4 billion yuan ($4.2 billion) it reported in the prior-year quarter.

Moreover, free cash flow (FCF) continues to drop. In the quarter, its FCF was negative $2.5 billion, down from $544 million in FCF 12 months ago. Alibaba is engaging in heavy capital expenditures in its efforts to remain competitive in the AI space; that's likely the reason its free cash flow went negative.

If that were all the bad news, one might be able to discount it, based on the argument that Alibaba's high spending today will benefit the company in the long term. However, rising political tensions may have made the stock too risky to hold.

In May, it was reported that China had imposed travel restrictions on its AI professionals, sparking concern that it was isolating its AI sector and reducing collaboration. And the U.S. and Chinese governments remain at odds on AI hardware. In early June, the U.S. Defense Department listed Alibaba as a "Chinese military company," and not surprisingly, that designation has apparently impacted its stock.

Although Alibaba trades at a price-to-earnings ratio (P/E) of just 16, the combination of all of these factors has left many investors with the view that it's too risky to touch -- including, apparently, Cathie Wood and her team.

Is it time to sell Alibaba stock?

Knowing Alibaba's situation, investors who don't have a huge tolerance for risk should probably sell the stock.

Admittedly, the 16 P/E ratio makes it a tempting option. If its AI investments eventually pay off and the Chinese and U.S. governments start to make moves that reassure investors, the stock price could surge. That by itself is a good argument for holding a speculative position.

Nonetheless, the two governments seem intent on imposing trade restrictions on each other, and that political risk alone could sink the Alibaba investment thesis, regardless of its financial metrics. Given the uncertainties around the company's business environment, it probably makes sense to follow Ark Invest's lead and avoid holding a large position in Alibaba stock.

Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.