Alibaba Group Holding Ltd (NYSE:BABA) is in striking distance of dethroning Amazon.com Inc as the largest eCommerce company.
Shares of Chinese eCommerce giant Alibaba Group Holding Ltd (NYSE:BABA) have more than doubled this year, handsomely outperforming the Nasdaq Composite as well as its American counterpart, Amazon.com Inc (NASDAQ:AMZN). The 105% rally in Alibaba stock has also brought the Chinese giant in striking distance of dethroning Amazon.com Inc as the largest eCommerce company in the world. Amazon had overtaken Alibaba as the largest eCommerce retailer back in July 2015, when concerns about the Chinese economy had dragged the stock from its post IPO highs. Fast forward to September 2017, investors are driving Alibaba stock higher on the perceived strength of the Chinese economy. Alibaba stock has come a full circle since then. Given its strong China focus, Alibaba stock is considered to be a play on the Chinese economy.
Both Alibaba and Amazon investors have had a good year so far. Both the stocks were tracking each other till the start of June when Alibaba held its annual shareholder meeting. During the shareholders meet Alibaba delivered much better than expected guidance which propelled the stock on its current trajectory. On the other hand, the rally in Amazon stock was brought to a halt by a sell-off in the FAANG stocks. The miss on earnings in the June quarter further extended the pressure on Amazon stock, sending the stock 10% lower from its all-time high. On the other hand, Alibaba's June quarter results further reinforced investors' bullish sentiment around the stock. The company had delivered a beat on both the top and the bottom line estimates.
What is driving Alibaba stock higher?
There are several factors driving Alibaba's current stock rally. The Chinese economy has been doing remarkably well. GDP growth came in at 6.9% in the first half of the year, surprising many analysts. Retail sales have remained strong, which has directly benefitted Alibaba. And given that online retail contributes just 14% of total retail sales, Alibaba still has room to grow. Core commerce segment revenue grew by 58% to $6.44 billion. Then there is Aliyun, Alibaba's cloud computing business. Alibaba saw its cloud segment revenue grow by over 93% YoY, from 1.3 billion to 2.3 billion RMB (US $359 million). Average revenue per user is also seeing growth. Each paying customer generated 2,405 yuan ($355) during Q1 2018, compared with 2,154 yuan ($323) in the same quarter previous year. Adjusted EBITDA also saw major improvements.
Alibaba has global ambitions for its cloud business. According to the IDC, spending on total cloud infrastructure (public and private), is projected to grow at a 13% CAGR to reach $60 billion by 2020. Expansion in other geographies will help Alibaba capture a greater part of this growth. Alibaba is also investing in other growth areas. The company has recently invested heavily in India and South-East Asia, two of the worlds fastest growing eCommerce markets. Last year, Alibaba had invested $1 billion in Lazda group, one of the largest eCommerce operator in the region, and recently topped its investment in the company by another $1 billion. It is also planning to invest up to $500 million in Indonesia’s largest eCommerce platform, Tokopedia. Alibaba also made a $100 million investment in Bigbasket, the biggest online grocery player in India. It is not just growth, Alibaba is also a very profitable company. The company has a net margin of 28% and operating margin of 32%.
Analysts remain optimistic on Alibaba stock.
Analysts continue to remain very optimistic about the prospects of Alibaba stock. Oppenheimer has a price target of $200 on Alibaba stock while Goldman Sachs has raised its price target on the stock to $210. Of the 46 brokers that cover the Chinese tech giant, not a single one has a sell rating. Its mean target price is $195.51 according to Yahoo finance. Analysts are also bullish on Amazon, though to a lesser extent. Amazon has one sell rating out of the 47 analysts covering it, and it's about 18 percent lower than its mean target price of $1,147.48.
However, not all are happy with Alibaba's performance. There are many who have shorted the stock for various reasons including higher valuations, the threat from competition and concern around its accounting policies. As per the latest data from S3 partners, Alibaba is the most shorted stock in the world, with over $22.1 billion worth of shares shorted as of mid-August. The dollar value of short interest has shot up by 125% from the beginning of the year, which is more than the rally in Alibaba's stock price. However, according to the latest data from S3 partners, shorts are down by nearly $9.8 billion in mark-to-market (MTM) losses for the year.
Alibaba stock has strong momentum.
Both Alibaba and Amazon are headed towards a $500 billion market cap. However, unlike Amazon, Alibaba has strong momentum backed by strong profits and growth opportunities. The company may not only take the crown of the largest eCommerce company from Amazon, it could also pip Amazon in the race to a $500 billion market cap mark.
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