Let’s look at the numbers:
Alibaba reported earnings most recently in June of this year. Their quarter was one of the strongest quarters I’ve ever seen a company report. Total revenue grew by 61% YoY with a majority of that coming from Cloud Revenue, which grew 93% YoY. Because of strong revenue numbers, EBITDA margin grew to 43% and Non-GAAP FCF rose to $3.9bn.
Alibaba’s expenses are already relatively low as their SG&A + Product Development Expenses combined are less than 15% of their revenue.
Overall, Alibaba is still a growing company, and that is clear when analyzing their numbers. With that being said, its valuation is still relatively cheap when compared to its competitors. For example, Amazon is trading at 300x earnings, whereas BABA is looking at 31x 2019’s earnings, and 18x 2020’s earnings. As the company continues to grow, their profitability will start to reflect that, which can be seen by the correlation of growing EPS over the past 5 years.
Alibaba Vs. Amazon:
Since I keep drawing comparisons to Amazon, I think it’s time to explain my reasoning.
Jeff Bezos is a wonderful CEO, brilliant businessman, but more importantly, his background in Wall Street allows him to know what to say to impress analysts. Unfortunately, Amazon is on Trump’s radar (between USPS deals and Pharmaceutical mergers).
Alibaba’s CEO, Jack Ma, on the other hand is more than just a CEO. He is the face of business in China, and actually serves as a global ambassador. Last year, Ma spent more time visiting foreign nations than President Xi did. The Chinese Government blesses Alibaba for taking charge on key initiatives and leading in the revolution of “New China.”
The Companies Themselves:
1. At the time of writing this, Amazon’s market cap is about 94% larger than Alibaba’s, yet China’s e-commerce market alone is expected to be larger than the rest of the world. By 2020, it is estimated that Asia will account for 66% of global e-commerce sales with China accounting for 58% of these sales.
2. While Amazon is dominant, it only claims 47% of all US retail sales. Alibaba already represents 81% of all online Chinese sales. To put this into perspective, Alibaba has something called “Singles Day.” On this day, Alibaba recorded a record $25.3bn in sales, which is 18x bigger than Amazon Prime Day, and 2.5x bigger than Black Friday and Cyber Monday combined.
3. Alibaba grew revenue over 20% faster than Amazon and has a much higher margin despite a more nascent cloud business that hasn’t peaked yet.
4. Alibaba owns 33% of Ant Financial, which is worth $150bn. Ant Financial is the largest credit database in the world. This integrates directly into the Alibaba Ecosystem as Ant is the world leader in mobile payments (integration into Alipay). This is important because mobile payments in China have already reached $790bn while the US is at a mere $74bn.
Upside Potential vs Downside Risk:
Let’s start with the upside because I believe Alibaba is a screaming buy.
1. Alibaba serves about 80% of the Chinese e-Commerce market where population density is very high. E-Commerce Index reveals which developing markets hold the most potential for online growth, and China is now leading the race in terms of maximizing the potential of the Internet compared with the West. The low-cost, widely available telecommunication infrastructure in China has increased the popularity of online shopping. According to a research report, China’s e-Commerce market is expected to pass $1.132 trillion in 2018. Therefore, Alibaba that dominates the world’s largest e-Commerce market has an edge over its competitors.
2. Alibaba’s GMV remains solid.It is a very important metric for e-Commerce companies. Alibaba’s Tmall platform is well positioned to capture the rising demand for high-quality products and services. It accepts only verified stores and sells only genuine products, helping build consumers’ trust and in turn increase conversion rates. In order to further expand its GMV, Alibaba launched Tmall global, an extension of Tmall.com, in 2014. This B2C online platform allows foreign merchants to operate their store and deal with Chinese consumers directly, increasing the number of active buyers on its platforms, thus boosting Alibaba’s GMV. The company aims to achieve $1 trillion in GMV by fiscal year 2020.
3. Alibaba continues to witness increasing monetization rates. It is the amount Alibaba earns from the sale of goods on its platforms. The company’s focus on foreign brands and other high-quality merchants on its platforms continue to increase the online marketing inventory on both mobile and the PC, thus further improving the monetization rate. Moreover, as the mobile platform offers immense growth potential, monetization for mobile is gaining momentum driven by new and advance mobile apps launched by the company. In fact, management expects mobile monetization rate to approach or exceed that of PC, expanding profits for the company. Talking about the numbers, mobile contributed less than 40% of the company’s GMV at the time of its IPO which has now increased to more than 75% at the end of fiscal 2017.
4. Alibaba has been supplementing organizational growth with strategic acquisitions. The company spent billions on acquisitions in varying sectors ranging from film production to taxi-booking services to professional soccer. Recently, Alibaba Group announced the acquisition of the remaining outstanding shares of a China-based food delivery start-up, Ele Me. The latest acquisition will help Alibaba expand product offerings in the food delivery market. Last year acquired Chinese Internet TV platform Youku Tudou Inc., targeting the substantial opportunity in the web video content market. I believe that a video content service is one of the important mediums through which Alibaba can launch new products and services. According to a report by Internet consultant iResearch, China’s market for online video will jump to 36.6 billion yuan in 2017. Alibaba has invested $700 million in Intime Retail Group Co., which owns department stores and supermarkets in China. The acquisition was intended to bolster Alibaba’s mobile and distribution businesses and strengthen Alibaba’s position in the e-Commerce market. Additionally, it agreed to acquire AutoNavi Holdings for $1.5 billion, bolstering its Internet mapping service. Alibaba is leaving no stone unturned to extend its e-Commerce reach to mobile, video and distribution business.
5. I expect Alibaba’s payment platformwill continue to grow, driven by the move toward online shopping all over the world. Its online payment platform includes a lot of services like bank transfers, Alipay account transfers, payment of credit card and utility bills at no extra cost, mobile top-up with credit, bank balance check, bus ticket purchases, online checkout on many sites and in-store payments. Moreover, Alibaba has made full use of the exponential increase in smartphones and tablets for making payments. Though Alibaba’s services are currently available only in China, the company is making all efforts to expand internationally.
6. Alibaba is also taking steps to strengthen its position outside China.The company has been looking to international markets to expand its business and its current strategy is to generate earnings through investment in the U.S. In pursuance of this strategy, Alibaba made its first foray into the U.S. retail market in June this year with the launch of a low-profile website with an American name — 11Main.com — a platform for smaller sellers to hawk their wares. The e-Commerce market in the U.S. are expected to grow at double-digit rates over the next few years and this is the potential that the company wishes to tap. However, in order to be really successful in America, Alibaba needs to understand the mindset of U.S. consumers.
7. Alibaba is working on the development of what it calls “New Retail”to bridge the gap between online and offline shopping using its big data capacity. It expects that the system will offer brick-and-mortar retailers new ways to evolve across marketing, inventory and distribution networks. These look promising and will not only reshape the retail landscape but also help Alibaba fend off competition. Alibaba’s partnership with Bailian is a part of this “New Retail’ strategy. It plans to leverage on its big data capacities to explore new retail opportunities across outlet design, technology research and development, customer relationship management, supply chain management, payment and logistics.
However, I think there is some potential downside, and one of them is a huge red flag.
1. Alibaba involves certain risks due to the strict laws in China. According to Chinese laws, it is illegal for a foreigner to own stocks in any Chinese Internet company, which means that no one other than the Chinese can own shares of Alibaba. Because of this, shares listed on the NYSE are of a holding company called Alibaba Group Holding Ltd. This also means any American shareholders will get some of the profits, but won’t have voting rights.
2. Alibaba completed a number of acquisitions over the past few years, and while I am the first one to say that mergers are good for expanding businesses, it does represent higher costs and a lower margin in the short term.
3. Alibaba is facing growing competition in the short term. Mainly from a company called Tencent. As Alibaba expands into the US, it will also face competition from eBay, Amazon, and Paypal.
Where do I see Alibaba’s Stock Going?
In short, Alibaba has the potential to be a $350 by 2020 assuming they keep growing at the rate they are. In the near future, I expect the stock to be at $250, and that is for a few reasons.
Uniquely, over 50% of Alibaba stock is controlled by 3 entities: Softbank, Altaba, and Jack Ma. This concentration of ownership combined with Alibaba having 29% of its shares being sold short could make for some enticing profits if they continue to grow their top and bottom lines. Also, the stock has 13% in the past 9 months, despite growing revenue over 50% throughout this time. Alibaba’s P/E multiple has shrunk by 11x over the same time period and is at its lowest level since early 2017.
The Chinese government is adamant that it wants the major tech giants to return to their home country. WSJ reported a few months ago that an Alibaba secondary listing could happen as soon as late summer in the local Chinese A-share market.
Locally listed Chinese stocks trade at higher valuations to their US counterparts as illustrated by Qihoo, Focus Media, and Giant Interactive, which were re-listed in Shanghai/Shenzhen and all three stocks saw an increase in market cap of 3x-5x by doing so.
Unfortunately, Alibaba has been trading an extremely cheap multiple for the growth they are producing. As warren Buffet says, “you must be greedy when others are fearful,” and a multitude of investors are fearful of China and their companies.
Alibaba has created a global enterprise with a footprint that includes every buzzword from artificial intelligence, cloud, datacenter, ridesharing, etc…. Nothing is going to derail this company from going to $250 in the next year.
Net net, the Chinese e-commerce giant now looks like a very compelling investing opportunity, as TipRanks analytics showcasing BABA as a Strong Buy. With an average price target of $234.63, analysts are predicting massive upside potential of 51% for the stock. In total, Alibabs stock has received 19 buy ratings with no Hold or Sold ratings. (See BABA’s price targets and analyst ratings on TipRanks)