- Alibaba sentiment is strongly linked to the Chinese economy.
- Alibaba continues to beat analysts' estimates.
- Current investments will add significant revenue in the near future.
For a company with the enviable record of “The World’s largest ever IPO”, Alibaba Group Holding Ltd (NYSE:BABA) has struggled in the stock market as of late, and this isn’t all to do with the current state of the company. After experiencing good growth, the Chinese economy is currently at 6.7% growth, as compared to 7.3% in 2014. Notably, China’s rapidly growing economy had a big part to play in Alibaba’s record-breaking IPO. Investors saw a flagship company in the world’s strongest economy. It seemed like an opportunity for them to ‘cash-in’ on the momentum.
The rising bearish sentiment surrounding Alibaba is also driven by the fact that there are no clear indications as to how strongly China will be able to bounce back. Notably, China’s economy is heavily controlled by the government, and this has left investors worried.
Interestingly, Alibaba has managed to beat Wall Street’s expectations over the previous four quarters. And this is despite competition from the likes of JD.com. Furthermore, Alibaba’s gross trading volume shows that this is an ambitious company with solid numbers. Alibaba tripled their trading volume from one trillion yuan to 3 trillion yuan or about $475 billion in just 4 years (2012-2016). And these figures are coming from a company which was founded 17 years ago.
When we consider that Alibaba controls more than an estimated 80% of the Chinese e-commerce market, and China’s consumer spending has shot up by 10.7% in March, Alibaba is well-placed for continued growth.
Who said anything about a slowdown affecting Alibaba?
Alibaba’s e-commerce business aside, they continue to establish new growth opportunities. For instance,Alibaba is urgently pushing its cloud platform with the realization that this is a growing market and one they stand to profit from in the longterm.
The Chinese e-commerce powerhouse spreads risk by serving the B2B, B2C and consumer to consumer segments. As a result, not only are they able to generate revenue from these multiple streams, but they are able to lower the risk, and are stronger as a result of this. For instance, if the B2B market is weak one-quarter, they can rely on their other market segments.
Alibaba Growth opportunities
Notably, despite the fact that China has one of the world’s strongest economies, it still has hundreds of thousands of villages which haven't yet been fully exposed to e-commerce. Penetration in this “ripe” market segment requires trust in e-commerce and widespread internet access. Fortunately, these two factors are on the rise in China.
E-commerce is fairly widespread in the West; however, this isn’t the case in the East. In a letter to shareholders last year, Alibaba CEO, Jack Ma, stated that e-commerce accounts for just 9% of retail spending in China. As alluded to earlier, the opportunity for growth in China alone is huge.
Then we move on to the West. Alibaba is popular among Western wholesalers as a source of getting good products at reasonable prices. However, they have a reputation among Western consumers for allowing counterfeit goods to be sold on Aliexpress. If Alibaba can “clean up” their store, they have a good chance of gaining greater ground in the more lucrative Western market.
Like many other tech giants, Alibaba is making significant investments into virtual reality technology. Some reports suggest that virtual reality technology is set to become a multi-billion dollar industry in 2 years time. Notably, Alibaba has invested $793.5 million into a company with little track record. Although no one really knows the full potential of virtual reality, it promises to change the way we communicate. Plus, it is certainly applicable to the defense and healthcare industry. Alibaba is setting themselves up to capitalize on technology which could be as game-changing as the first ever mobile phone.
In conclusion, Alibaba’s revenue growth and potential in China and beyond leads me to believe that this is an undervalued stock, and as is usually the case with such a stock, the market will certainly catch up. They have been “punished” by a volatile Chinese economy, which was bound to experience a slowdown in growth at some point. Consumer spending is still strong in China and the demand for China-made goods is certainly high.
It is worth buying Alibaba stock now that the price is fairly low and make a good ROI by the announcement of the next earnings result. All indications point to them beating analysts’ estimates again, and this is likely to trigger a short-term boost in their stock price. Besides that, Alibaba is also a stock worth going long on for the long term.