With few concerns about one of the Alibaba Group Holding Ltd's (NYSE:BABA) recent investment, should investors be worried about their investment in BABA stock?
Shares of Jack Ma founded Alibaba Group Holding Ltd (NYSE:BABA) have had an amazing bull run in 2017 but the rally has stalled over the past few weeks. Alibaba stock is still up nearly 98% in the year-to-date and Wall Street suggests the growth in BABA stock has just got started. However, the Chinese eCommerce giant's recent investment in the Cainiao Smart Logistics Network Ltd which made it the majority owner has raised some concerns among investors. Investors seem to be worried about the impact of the loss-making delivery firm on Alibaba's bottom line numbers. Should investors be worried about their investment in Alibaba stock? We feel that the concerns surrounding Alibaba stock are overdone. BABA stock is a good long-term buy. Let's take a closer look.
What are the Analysts saying?
The analysts seem to be divided on the impact of Cainiao investment on Alibaba stock. Analysts from Raymond James are still bullish on BABA stock but according to their estimates, this heavy investment could cap limit the stock price upside. They have reduced their price target on Alibaba stock to $210 from $220. On the other hand, MKM partners in their note to clients suggested that Cainiao's losses won't put a big dent as expected on the company 's overall profits. In their note, they stated: "The effect of consolidation will move Cainiao full revenue and loss into BABA’s income statement, offset by minority interests sharing 49% of the loss. Previously, BABA was taking 47% share of loss in equity investees. The 400 basis-point incremental drag to earnings (80 million RMB) is negligible against our forecast of 27 billion net profit for the second half of the fiscal year."
Similar thoughts were echoed by Paul Gillis, a professor at the Peking University's Guanghua School of Management. He suggested that the accounting changes after the Cainiao investment will mean more assets on balance sheet but not likely to hurt Alibaba's income statement due to its hefty earnings, which nearly doubled in Q1 2018. This would, in fact, help Alibaba resolve its issue with the SEC. We also believe that effect of this investment on Alibaba's financials could be almost negligible with multiple emerging growth drivers for Alibaba.
Cainiao investment could give a boost to International expansion.
With the $15 billion investment in building its global logistics infrastructure over the next five years, Alibaba could be taking out a page of Amazon's (NASDAQ:AMZN) book. The MKM partners analysts have an interesting observation when they suggest that with the $15 billion investment they "see potential for an Fulfillment By Amazon (FBA)/Prime-like flywheel with closer alignment of Cainiao and Tmall." The company aims to fulfill deliveries within China in 24 hours and international in 72 hours with the new investment along with Cainiao. This could go long way in helping the company rapidly expand its International presence.
E-commerce firm Lazada Group, majority-owned by Alibaba, expects to roll out aspects of Alibaba’s consumer-to-consumer (C2C) marketplace Taobao in Indonesia, Thailand and the Philippines and the Cainiao investment could help make the scheme a success.
The eMarketer reports that as part of this "Taobao Collection store in store", the consumers from above mentioned countries can shop products sold by China-based merchants as well as items from Alibaba’s business-to-consumer (B2C) platform Tmall. Cainiao's Data Intelligent Network and algorithms have played a major role in the success of Alibaba and eCommerce adoption in China. With Cainiao, Alibaba can effectively hope to repeat the same success in this booming markets by addressing several friction points in the logistics supply chain. Cainiao's expertise could be very vital in the success of Taobao Collection in these countries as goods would be made available from Taobao and Tmall's inventory.
Alibaba stock is still a strong growth play today.
Alibaba stock is still a solid long-term growth play with its growth intertwined with the company's dominant position in world's largest e-commerce market, expanding International footprint, rapidly growing cloud business, original content business and now gaming. With the Jack Ma founded company now also going after the $4.25 trillion offline retail opportunity, it’s easy to see why Alibaba makes an ideal target for any long-term investor. Wall Street is also very bullish on Alibaba's long-term growth prospects with 39 out 41 analysts covering BABA stock have a buy or strong buy rating as per Yahoo finance. Alibaba stock remains a formidable long-term play.
Looking for fundamentally strong tech stocks like Alibaba? Check out Amigobulls' top stock picks from the tech sector, which have beaten the NASDAQ by nearly 151%. Interested in automotive stock? Then, we also have our top picks from the auto sector, which have beaten the S&P 500 by a whopping 285%. If you're a trader though, you should check out our daily trading ideas section for daily, free updates on the latest crossovers and other popular technical signals.