- Alibaba stock has surged after the recent earnings beat, hitting a 52 week high.
- Concerns around the Chinese economy and Alibaba's growth are easing.
- Alibaba has solid fundamentals and strong growth opportunities.
The Alibaba (NYSE:BABA) stock price has been racing northwards since the company reported earnings on August 10th. Amid worries about China’s economy Alibaba posted a 59% YoY revenue growth, beating analyst estimates on both revenue and earnings. While revenue came in $200 million higher than estimates, EPS came in $0.14 above estimates. Alibaba stock has gained more than 15% since then, hitting a 52 week high of $104.3 on Tuesday, September 6th.
In spite of the recent rally in Alibaba's stock there are few concerns which remain. Alibaba has been accused of not doing enough to fight the menace of fake products on its site. The stock also took a hit, sinking 9%, after it disclosed that the SEC has launched an investigation into its accounting practices. There also questions about Alibaba's valuation, which some say is expensive. However, in spite of all these concerns, Alibaba stock is a solid long term buy. According to a report on Barron's, a sum-of-the-parts valuation of Alibaba indicates a 30% upside for Alibaba stock.
The Chinese Economy Is Not Collapsing
eCommerce continues to remain by far the largest segment for Alibaba, contributing more than 80% of the total revenues. Hence news regarding this segment is the key driver for Alibaba stock. In fact, Alibaba stock had remained depressed on fears that double digit eCommerce growth may not continue due to a collapsing Chinese economy. But latest quarter growth eased those concerns a little. And the Chinese economy has not collapsed the way many feared.
Last May, China came out with its GDP number which set alarm bells ringing. With grim prognosis of the Chinese economy having a hard landing, global equity markets tumbled. This hit Chinese companies pretty hard with Alibaba stock collapsing more than 40% in 5 months. But the Chinese economy has managed to avoid a hard landing with its GDP growing at 6.7% in the latest quarter. While the growth figure is less than 7% which Chinese economy had achieved in the past, it is still much better than rest of the world. While concerns still remain, it's no more a doomsday prognosis.
To continue its growth, China is planning to steer its economy from investment dominated to consumption dominated. This structural change in the economy with rising consumption expenditure will definitely provide a boost for Alibaba stock. And the level of disposable income is predicted to rise. According to a Mckinsey report, by 2020, the size of affluent customers, with income above $16000 will rise to 57% of the population. With rising disposable income and growing internet penetration, the e-commerce segment will continue to grow.
Alibaba has remained strong on both fronts, revenue as well as profitability. While Alibaba's latest quarter growth came in at a pretty strong 59%, its long term growth has been equally impressive. The 5 year revenue growth has been above 50%. And while the growth may not remain this strong, it will still be in high double digits.
While in many senses Alibaba and Amazon are comparable, one aspect where both are significantly different is profitability. Alibaba is likely to be the most profitable e-commerce company in the world. Its operating margins have consistently remained above 25%. The return on equity is above 20%. One of the reasons Alibaba has managed to stay profitable is because it doesn't involve itself in the transportation of goods between sellers and buyers like Amazon does.
Alibaba's cash flows are also quite strong. The company generates billions of dollars in operating cash flows every year. The cash flows from operations have almost doubled from $4.2 billion in 2014 to $8.25 billion in 2016. In the latest quarter Alibaba generated $2.25 billion in cash, an increase of 33% from last year.
Alibaba's long-term growth opportunities remain intact. On the e-commerce front, Alibaba is reaching out to rural areas in China, home to 45% of the population. The growing middle class will lift the consumption levels providing strong growth opportunities. Another growth frontier is Alibaba's cloud platform, Aliyun. The latest quarter saw Aliyun segment growing its revenues by 150% and improve its EBITDA margin from -76% to -13%. The profitability will continue to improve with an increase in the scale. Morgan Stanley estimates that Aliyun will report a revenue of more than $8 billion by 2020. To quote Morgan Stanley equity analyst Robert Lin:
"We value AliCloud at US$39 billion ... and our new revenue forecast for AliCloud implies faster growth than that of Amazon Web Services."
The annualized revenue from Aliyun in the latest quarter was around $748 million. Analysts expect Alibaba to grow its earnings by more than 28% every year for the next five years.
According to a report by schaeffers, the call put ratio in Alibaba stock is increasing, indicating that traders are betting on Alibaba's stock to continue its northward journey. Alibaba stock has surged more than 15% in the last one month on the back of strong earnings and better outlook. The company has solid profitability and strong fundamentals. Alibaba's long term growth story remains good. Alibaba enjoys a buy rating from Wall Street. Investors should definitely consider Alibaba stock for long term investment.