- Alibaba failed to meet high expectations following its IPO.
- Alibaba continues to make sound strategic investments.
- In 2016, Alibaba's previous investments are set to flourish and add significant revenue to their topline.
Regularly touted as “The Amazon of the East.”, Alibaba (NYSE:BABA) now stands at a market cap of an astounding $208.4 billion. In order to give you some idea of the weight of expectation surrounding Alibaba, their IPO was the largest in history. Shares were in high demand, and investors were hoping that their dominance of the Chinese market could be transferred to the Western world. However, due to certain unforeseen problems such as economic problems in China, and constant issues such as strong competition, and Alibaba’s brand image, they have failed to live up to the hype thus far.
However, in the world of business things change, and sometimes we are getting a glimpse of what is to come. Alibaba is still a strong prospect for significant growth in 2016. Let’s delve into why that is.
Factors for Alibaba growth
Despite heated competition in the Chinese ecommerce arena, Alibaba has still managed to control 58% of the business to ecommerce market. Interestingly, unlike much of the Western world where internet access tends to be readily available, there are still huge swathes of rural China yet to get onto the internet. And due to the positive brand image Alibaba enjoys in Greater China, they are in a prime position to capitalize on widespread internet adoption.
Secondly, Alibaba’s ecommerce offerings such as Aliexpress are notorious for being the Mecca of counterfeit goods. This is actually a selling point in Asia because incomes are lower. However, this has proved to be a limiting factor with regard to rapid expansion into the Western market. All Alibaba need are some fulfilment centres in key regions, and they will be able to go toe-to-toe with Amazon. Unfortunately, Alibaba is stuck between a rock and a hard place. You see, commission made from the sale of counterfeit goods is a huge revenue driver for them. Therefore, although they won’t admit it, they aren’t in a hurry to clean up their ecommerce offerings.
Thirdly, Alibaba, much like Amazon, has an insatiable appetite for growth. For instance, they just recently inked a longterm deal with Disney to bring Disney’s popular content to a large Chinese population. Alibaba continues to get such potentially lucrative deals ahead of the competition. And in order to leverage on the growth India is currently in the midst of, Alibaba recently decided to increase their investment in Paytm. One can expect them to diversify their interests in India in the short term.
Lastly, in order to maintain their lead in China before looking for fertile ground in the West, Alibaba has been on an acquisitions splurge. For instance, Youku Tudou (NYSE:YOKU) and Sunning Commercial group were acquired for a combined $8.2 billion. Moreover, Alibaba has its sights set on taking a piece of the growing ride hailing industry. Notably, despite their conquests, Alibaba is always looking at the next big strategic investment.
Alibaba Stock Performance
Investors who make their decisions primarily on stock performance are likely to turn their backs on Alibaba. Alibaba stock price is down by approximately 21% year-to-date. Therefore, the stock has underperformed the S&P 500.
On the other hand, net income growth has increased by a highly impressive 571.9% showing that when it comes to getting to the money, Alibaba are masters. Moreover, prospective investors will be happy to note that Alibaba has reported significant improvements with regard to earnings per share.
In conclusion, Alibaba continues to make strategic investments and growth akin to its Western brother, Amazon. Alibaba’s lack of growth with regards to share price is largely based on the fact that they failed to reach the high expectations set before its IPO. The company continues to diversify their investments across industries, and should become a more formidable force in 2016. It is worth investing now when the Alibaba stock price is relatively low- and unlikely to go significantly lower- in order to reap a return when it bounces.