"No, they do not have babies."
Translation:Nein, sie haben keine Babys.
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Only "Babys" is correct. The same goes for "Partys", "Hobbys", "Ponys", etc. Note that many native speakers are not aware of this.
Yes, I guess the problem arises partly because of marketing. Marketing people tend to use a lot of English phrases and prominently place their slogans everywhere. So, it's not uncommon to see 'Babies' written on a pack of disposable diapers. Many Germans adopt these spellings. But as christian already pointed out the correct German plural is 'Babys'.
Babys = babies
Kinder = children
There's no reason to be inaccurate.
If you don't like the word "Baby", you can use "Säugling" instead, but you should know that "Baby" is used a lot more, and "Säugling" sounds really formal.
I guess there is a subtle difference here: "Sie haben keine Babys" negates "Babys", and "Babys haben sie nicht" negates "haben". As if they had something, but not babies.
Normally, if you use the straight word order and say that someone does not have something (or has "no something"), you use "kein". In English, "no" is not so commonly used as "kein" in German.
Also, I believe it is a thing you learn by seeing it numerous times. After you get tons of "nicht's" and "kein's", you get a feel of which word suits better.
I'm not exactly an expert on this, but I'd say it is so uncommon that it is almost incorrect. Basically, "nicht" negates a verb, and "kein" negates a noun, but in this case you can negate both the verb (have) and the noun (babies). I can suggest a rule of thumb: if you can fit in "kein", use it (and negate the noun). If you can't, it's time to use "nicht".