- Alibaba's fundamentals look very strong when you combine rising incomes in China along with the country's most popular marketplaces.
- Alibaba has diversified the company by branching into cloud computing and digital media which will become profitable in coming days.
- Investors should use the pull back in the stock to get long especially after its fiscal second quarter beat on earnings and revenue.
Any stock that is meaningfully increasing its top and bottom lines despite continually losing market capitalization is definitely worth analyzing from an investment standpoint. This sums up Alibaba (NYSE:BABA) whose share price topped out at $109+ at the end of September and has been declining ever since. The e-commerce company beat top and bottom line estimates in its latest earnings report. Earnings increased by 46% and revenues increased by 55% which again cemented the company as the largest online and mobile commerce company in terms of GMV (Gross Merchandise Volume) on planet earth today.
Alibaba is doing the same as Amazon (NASDAQ:AMZN) , it is positioning its marketplaces to ensure it attracts both sellers and buyers on mass. In fact, the company's goal is to make sure all retail related products go through its marketplaces. Value will be the key driver, which is why high-quality merchants will be crucial to the growth of Alibaba's marketplaces. The more high-quality traffic Alibaba attracts, the more you will see deals (such as the Steven Spielberg’s Amblin Partners) continue to take place. I see increasing monetization rates and spending levels per users as powerful momentum indicators for this type of business. Incidentally, both are increasing which illustrates how Alibaba's platforms (Taobao, Tmall and Juhuasuan) are becoming more effective. I believe this trend will continue over time. Here are 3 other strong reasons why one should buy this stock on pullbacks.
Alibaba's Tmall Revenues Will be Helped Enormously From Taobao's Popularity
It is no secret that China has become the new battleground for e-commerce companies. Walmart has increased its stake in JD.com and Amazon has launched its Prime service in an effort to steal market share off Alibaba in this massive market. However, Alibaba is in the pole position with currently over 430 million buyers active across its e-commerce marketplaces. Remember this is only roughly 30% of the Chinese population which is why there should be ample runway for growth in this market for years to come.
Furthermore, middle-class incomes are rising steadily in China despite economic concerns. Therefore I expect its business to customer platform (Tmall) to steadily increase its volumes as more and more merchants get added to the marketplace. I envisage Alibaba's long-standing success story ( customer to customer platform Taobao) diverting as much traffic as possible to Tmall over time which will boost conversions.Tmall has been embedded in the Chinese psyche as the first port of call when researching a particular item for purchase. No matter how hard competitors try, it will be very difficult for them to change this psyche in the near term. (Also Read: Amazon.com, Inc. Set To Take Significant Market Share From Alibaba)
AliCloud Revenues Will Grow Meaningfully Due To Competitive Pricing & Growth Outside China
Secondly, heavy investment is currently being ploughed into Alicloud and digital media/entertainment and I believe both will pay off in spades over time. Why? Well again just look at how much Alibaba is bringing in from each customer from a revenue standpoint. As long as unique revenue growth per customer is increasing, eventually we should see robust earnings growth from both these divisions. Alicloud reached 651,000 customers in its most previous quarter which was almost a 13% gain on a rolling quarter basis. Revenues more than doubled to $224 million and robust growth rates will continue as management has stated that investment will remain elevated. Therefore investors should not be concerned about the operating loss in the company's latest quarter. Remember the company's cloud offerings are still only available in China so expect rapid growth to continue here.
Digital Entertainment Revenues Will Go From Strength To Strength
The digital entertainment division will go from strength from strength as outsiders will continue to use Alibaba's popularity to license products. The consolidation of Youku contributed heavily to the 300%+ gain in the most recent quarter but again investors should look at monetization rates which are improving across the board. Investors should concentrate on the $5.1 billion in revenues that the company took in as a whole and the fact that digital entertainment is growing the fastest despite the slowing growth rates in the Chinese economy. The Amblin partners deal will encourage more media companies to try and sell their wares through homegrown companies in China. Digital entertainment growth for Alibaba is just getting started.
Singles Day - A Huge Success - The Trend Is Your Friend
Singles day saw more than 32% increase in sales over the last year and investors should really take note here. Why? Because Alibaba is the biggest e-commerce company in the world (GMV) and China is the market that still has the most potential especially when you consider the number of people who still don't have internet access. E-commerce sales are projected to grow meaningfully in the next few years and Alibaba is in pole position. Furthermore, the investment taking place in Alicloud will ensure the company will be able to deal with the enormous traffic levels that are coming. (Also Read: Alibaba Stock Is Due For A Correction Now)
Technical Chart Is Oversold
As the chart shows, the stock has become heavily oversold but I believe the stock will bottom out soon enough. The stock has strong support just under the $90 level. Investors should be using pullbacks to get long Alibaba stock.
To sum up, Alibaba produced an excellent set of earnings results in this second fiscal quarter but the share price hasn't followed suit. This company is still very much in growth stage with its cloud and digital entertainment offerings leading the way in terms of growth rates. Downside protection comes from its Taobao marketplace and encouraging fundamentals in China. Use pullbacks to get long this stock as the stock should return to $100+ levels by the end of next year.
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