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Alibaba IPO: Buy the Hype, and Buy BABA Stock

For once, a hot IPO is absolutely worth the hype


The year has been incredibly busy with IPOs, but nothing has compared to the looming market debut of the $160 billion Chinese e-commerce giant, Alibaba (BABA). Alibaba has been making headlines recently because as soon as it goes public, it will change the game in many ways.

alibaba ipo baba stockShould you buy into the hype? Absolutely.

Alibaba will be the first play on China’s emerging consumer economy. At its current value, BABA will hit the market at a relatively rich price-to-earnings ratio of around 43 times trailing earnings, assuming that Alibaba truly does price its 2.4 billion shares at $66.

Let me put that into perspective for you. Walmart (WMT) trades at 15 times earnings. EBay (EBAY), which Alibaba most closely resembles as a third-party online marketplace, is currently operating at a loss, while Amazon (AMZN), the other U.S. e-commerce giant, supports a stratospheric P/E of 515.

On a pure value basis, risk-sensitive investors may not be interested in BABA unless shares dip below $22 or so — a scenario that is unlikely as long as Alibaba can simply avoid reporting disastrous news.

Needless to say, BABA is growing a lot faster than WMT. Last year, the U.S. brick-and-mortar behemoth barely bumped its earnings up 1%. On the flip side, the Chinese company booked earnings-per-share growth above 170% in that same period. Adjusting for that growth rate, Alibaba is clearly attractive on its own terms and would actually remain compelling even if EPS growth slowed to a still-robust 45% or so a year.

E-commerce is already twice as big a market in pure dollar terms in China as it is in the U.S. Alibaba owns 80% – 90% of the Chinese e-commerce market. As the Chinese middle class grows and consumption rises, a disproportionate amount of that organic growth should continue to feed right back to BABA. The upside already favors Alibaba, and if BABA climbs to $100, that’s a 50% win for those who can buy in at $66.

Chinese retail consumption now represents $3.84 trillion per year and is still growing at an annualized rate of 13% – 20%. Extrapolating the trend, BABA will be a bigger retail opportunity than the U.S. by the end of 2016.

From a pure macro perspective, that kind of growth rate is clearly a little more attractive than the maybe 1% sales trend that many domestic retail stocks are fighting to capture.  With each Chinese consumer still under-spending their U.S. counterparts by a ratio close to 6:1, relative growth dynamics continuing to favor the Chinese side of the story for the foreseeable future is likely.

Alibaba also looks like a better pure e-commerce play than either of its relatively mature U.S. equivalents. eBay in particular looks vulnerable here because while its revenue is expanding off a much larger base ($18 billion last year versus $8 billion from BABA), the relative growth rates are trending to give the Chinese company a bigger footprint in the global online sales arena within the next 12 months.

Meanwhile, Alibaba is working a rich 46% margin on every fee it charges, compared to the U.S. auction site’s relatively modest 18% take — when, of course, it is profitable at all.

Barring a corporate or national disaster or a radical shift in national buying habits, those underlying dynamics changing much is hard to imagine. Otherwise, if you can own one mega-cap retail name for the long term, you should probably own Alibaba.

Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10 and High Octane Trader.

Article printed from InvestorPlace Media,

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