Analysts are calling e-retailer Alibaba Group Holding Ltd (NYSE: BABA) the “Amazon of China” and for good reason, as the company seems to have opened the throttle financially in recent months and revenues are pouring in.
The online-only retailer, founded in 1999, first traded publicly traded in the U.S. in 2014. Alibaba’s initial public offering was the largest ever IPO at the time, with a market cap of $231 billion. The form has only trended upward since then, as BABA now carries a market capitalization of nearly $480 billion and was named earlier this year as one of U.S. News’s best stocks to buy for 2018.
The one caveat on BABA is the burgeoning trade with the U.S., which is continuing to play out. If trade talks reach balance and a resolution is in place, the sky is the limit for Alibaba and BABA stock.
BABA stock at a glance. Analysts and money managers seem to share a positive view of Alibaba.
“As a market analyst, Alibaba is one of the most entertaining companies to watch,” says Ingmar Empson, founder of Strange Markets, a market research and analysis firm. “The company’s charismatic leader, Jack Ma, loves to put on a show. As China continues to build momentum in global markets, the company is riding a wave of investor optimism.”
Alibaba stock is at nearly $192 per share with massive bullish sentiment – 39 out of 47 analysts who track the stock rate Alibaba as a “buy” or “hold.”
“Alibaba’s revenue grew by 56.4 percent from fiscal year 2016 to 2017 and we see growth like this to continue on the top line,” says Carter Henderson, founder and chief investment officer in Murrysville, Pennsylvania. “Growth of active users jumped to 466 million by last quarter and mobile users surpassed half a billion, to 529 million.”
“Cloud computing revenues increased by 96 percent quarter over quarter and digital media and entertainment revenue grew by 30 percent,” Henderson says. “These two components helped achieve revenues of $23.3 billion and earnings of $3.46 for fiscal year 2016.”
Alibaba reached a key milestone at the end of the last quarter, reaching 1 million paying customers on its cloud platform which was an increase of 137,000 users from the previous quarter. “Chinese customers make up 86 percent of Alibaba’s total retail sales but their international presence is rapidly expanding,” Henderson says.
Pros of buying BABA stock. Investment professionals say the best way to play Alibaba is by taking the long view.
“When looking at Alibaba, we take a long-term approach. You must block out the short-term volatility from the U.S./China trade war,” Henderson says.
Henderson says BABA is currently undervalued by 30 to 40 percent – his firm’s price target is $250, (about the middle range among analysts who follow the stock.) “The catalysts to increase its share price in the next one to two years include management’s expectations for revenue growth between 45 to 49 percent in this fiscal year,” he says.
Alibaba’s continued strength in e-commerce is fueled by its vast data of insight on Chinese shoppers and its gain of market share in the cloud computing industry.
“Revenue from cloud computing increased 96 percent year over year and the number of paying customers is over 1 million,” Henderson says. “Other catalysts include a rising middle class in China and surrounding emerging markets, which will drive growth in e-commerce.”
“The most commonly cited reason for owning it is the belief that Chinese government policies favor domestic companies, preventing foreign players who might otherwise be competitive from seriously entering the market,” says Bernard George, a former hedge fund portfolio manager and now CEO of Nvstr.com, a social stock trading platform. “Our platform users also believe their Singles Day commercialization has grabbed a lot of global mindshare.”
Cons of buying BABA stock. Trade conflicts with the U.S. could derail BABA’s impressive growth.
“Alibaba’s share of Chinese consumption is already substantial and is growing every year,” says Gil Luria, director of institutional research for D.A. Davidson & Co., an investment banking company. “In addition, Alibaba is expanding into adjacent categories such as media and cloud services, which is helping it grow at its current 40 percent-plus rate.”
However, Alibaba is very much at risk from the trade conflict between the U.S. and China, Luria adds.
“Not only would the cross-border piece of the business be impacted, a reduction in U.S.-China trade could also weigh on the Chinese consumer, which is driving Alibaba’s domestic growth,” Luria says. “Furthermore, growth in the U.S. is part of Alibaba’s long-term strategy and is already being impaired by restrictions on Chinese investments.
“Alibaba shares are a good way to invest in the growth of the Chinese economy, but are also very much at risk from escalating trade tensions,” Luria says.
“From a market perspective, Alibaba is a strong, viable company,” he notes. “Consumers continue to demonstrate the strength of centralized e-commerce in today’s increasingly globalized world. Geographically, Alibaba is set to expand their operations further in Asia, opening up billions of dollars in potential revenue over the next decade.”
However, the most significant threat for BABA stock comes from within China’s own borders, Empson says.
“As President Xi (Jinping) continues to construct a consolidated post-Mao regime, increased government oversight and operational scrutiny could stem Alibaba’s projected growth potential,” he says. “Worse, as the trade spat between China and the U.S. continues to worsen, Alibaba could easily get caught in the crossfire.”
“As an investor, weighing the current geopolitical risk and financial profit potential pushes me towards a buy,” Empson says. “However, it’s important to understand Alibaba’s higher risk potential in the context of a broader diversified portfolio.”