Alibaba Group Holding Ltd. (NYSE:BABA) is seeing multiple emerging growth drivers, which make Alibaba stock a strong buy for growth investors.
Shareholders of Jack Ma led Alibaba Group Holding Ltd. (NYSE:BABA), the Chinese cloud-to-e-commerce giant, have been a rather happy lot this year. While the rally in Alibaba stock may have come to a screeching halt recently, the stock is still up by over 93% year-to-date, which is an impressive feat. For comparison, the Nasdaq Composite (INDEX:COMPX) is up by under 20%, which means that the Hangzhou based behemoth has outperformed the market benchmark by a factor of 4. Given the mindboggling returns, is it time to book profits in Alibaba stock and take some money off the table? Well, the way we see it, the recent pullback in Alibaba stock price may have provided yet another opportunity for long-term investors to buy shares at lower prices. Especially when you consider the recent positives, which could be emerging growth drivers for Alibaba Group Holding Ltd.
Alibaba Continues Its International Expansion
It is no secret that, whether it be e-commerce or cloud, Alibaba aims to extend its leadership in the Chinese markets to international markets as well. In what has been widely reported by various news sources over the past, the company has been striving to increase international sales by projecting Alibaba as a channel for international businesses to sell their products to the large customer base in China. While that's the e-commerce side of things, Aliyun, Alibaba's cloud services unit isn't far behind.
Aliyun led its global cloud peers with topline growth of 126.5% in FY 2016, bringing in revenue of $675 million for the year, which put it third on the list of global cloud players by revenue size.
However, Alibaba, the growth machine, isn't resting on its laurels and is aggressively pushing into international markets, to complement its market leadership in China. After establishing multiple data centers in Silicon Valley in the US, and the first one in Europe (Frankfurt) last year, Alibaba is on the lookout for another location to add its second data center in Europe.
Alibaba Stock Will Get A Boost From Exponential Cloud Growth
With Alibaba's cloud unit surpassing the milestone of 1M customers recently, JP Morgan Chase (NYSE:JPM) analysts Alex Yao and Gokul Hariharan believe that cloud could contribute 15% of Alibaba's overall revenue in 2021. To put things in perspective, Alibaba revenues are expected to top $47.3 billion in 2019, growing 47% and 33% in 2018 and 2019, respectively. At an average annual growth rate of only 20%, Alibaba revenue could hit $68.1 billion in 2021. If the JP Morgan analysts have called it right, 15% of this could equate to annual revenue of $10.2 billion, a 15 fold increase over the FY 2016 number. In percentage terms, this growth equates to an average annual growth rate of 72% through from FY 2016 through FY 2021.
Alibaba Turns To Another Multi-billion Dollar Opportunity
Cloud and e-commerce are only two of the many markets that Alibaba is focused on. If recent news is anything to go by, the company is focused on yet another opportunity, which could be worth billions of dollars, at least. We are referring to the rapidly growing online gaming market in China. According to research from IIMedia Research Group (reported by chinamoneynetwork.com), China’s online gaming industry was worth RMB 78.32 billion (US$11.8 billion) in 2016, with an aggregate active user base of 523 million. Total revenue in the industry is expected to grow another 88.7% to RMB 108.76 billion (US$16.39 billion) in 2017. Given that Alibaba is currently absent from this rapidly growing multi-billion dollar market, even a sliver of this market could add significant incremental revenues to Alibaba's top line.
Other Growth Drivers For Alibaba Stock
Cloud, international expansion and gaming are only a few of the many growth areas Alibaba is currently targeting. As we have covered in our recent Alibaba coverage, the company has turned its attention to the offline retail market in China, which accounts for over 85% of total retail sales in China. In quantitative terms, the offline retail market could be a $4.25 trillion opportunity for Alibaba. Alibaba stock is also a play on the logistics market in China, following its recent decision to acquire a majority stake in Cainiao, its delivery affiliate. As we had written earlier, the company plans to invest up to $15 billion in its logistics network over the next 5 years, with an aim to reduce global shipping times to 72 hours and domestic shipping times to 24 hours. All in all, Alibaba is a solid growth story.
To sum up, Alibaba stock is still a strong growth play today, backed by steep growth in its e-commerce and cloud segments. However, the company is planting the seeds for future growth, which leaves the company with multiple growth levers to fuel growth over the longer term. Hence, Alibaba stock remains a formidable long-term play which will continue to attract growth investors in droves.
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