Alibaba Group (BABA) is the world’s largest e-commerce company. It is based in China with a growing presence in several other countries. Overall, the company has a similar business model to Amazon, as its core e-commerce business is complemented by cloud computing, digital media and entertainment, logistics, and other innovative tech businesses.
The company is growing rapidly thanks to its numerous competitive advantages. Its large consumer and seller networks combine to form a virtuous cycle that drives growth, switching costs, and pricing power for its e-commerce business. Meanwhile, its massive consumer network and giant trove of consumer data aid its other businesses, in particular its AI-driven innovations.
This year, revenue is expected to grow by a robust 55.5%, followed by 31.2% in 2022 and 21% in 2023. Normalized earnings-per-share are expected to grow 35.9%, 2%, and 24.3% respectively over the next three years as well. Given how large the company has become (~$71.5 billion in 2020 revenue), these growth numbers are quite impressive. (See BABA stock charts on TipRanks)
That said, there is a decent bear case to be made on BABA. Its founder, Jack Ma, has recently attracted the ire of the Communist Chinese Party and BABA’s brand image has been somewhat tarnished in the Chinese media as a result. Furthermore, Chinese regulators have challenged and delayed BABA’s attempt to IPO Ant Financial and have also placed billion-dollar regulatory fines on the company due to its alleged anti-competitive practices.
Furthermore, its heavy dependence on the Chinese economy and ultimately the Chinese Government attaches significant geopolitical risk, especially given the growing tensions in the Far East. Last, but not least, Chinese firms have often proven in the past to have unreliable accounting practices and foreign investors have little recourse even if a Chinese company is proven to be reporting inaccurate numbers.
Valuation Metrics
Despite these challenges, BABA will likely remain a leading force in e-commerce, cloud computing, and AI-powered innovation in the Far East and potentially beyond for years to come.
Furthermore, the stock looks like a compelling bargain right now. Despite its strong growth projections, strong competitive advantages, and mountain of total cash and short-term investments (~$483 billion) on its balance sheet, its price-to-forward normalized earnings is a mere 20.3x. Given that this is roughly in-line with the S&P 500’s average forward price-to-earnings ratio, the stock appears to offer attractive risk-reward.
Wall Street’s Take
From Wall Street analysts, BABA earns a Strong Buy analyst consensus based on 26 Buy ratings, 1 Hold rating, and 0 Sell ratings in the past 3 months. Additionally, the average Alibaba price target of $298.57 puts the upside potential at 42.1%.
Summary and Conclusions
While BABA has its risks with which not every investor may be comfortable, it also offers compelling upside potential.
With numerous competitive advantages, a strong growth runway, a fortress balance sheet, an attractive valuation, and overwhelmingly bullish sentiment from Wall Street analysts, there is a lot to like here.
As a result, it looks like one of the more attractive opportunities in the market today, as long as investors are comfortable with the risks.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities
