At the World Economic Forum in Davos, Switzerland, the Chairman of Alibaba Group Holding Ltd (NYSE:BABA), Jack Ma, dismissed the notion that his company is the “Amazon of China.” Rather, he called Amazon.com, Inc. (NASDAQ:AMZN) an “empire” since the company is obsessively focused on controlling everything, such with its warehouses and logistics.
For Ma, this is really much different than the BABA way. He believes his company is instead a marketplace, which involves a massive ecosystem of partners. As he puts it: “Our philosophy is to empower others to sell, empower others to service, making sure the other people are more powerful than us.”
Yes, in a way, this is kind of like Uber, right? I think so. The asset-light strategy can allow for faster growth, nimbler actions and much higher margins.
BABA Stock and the Uber Approach
OK then, but what does this mean for investors in Alibaba stock? Is the Uber approach enough for there to be continued strong returns?
Well, first of all, there is no doubt that BABA stock is highly profitable, which is in stark contrast to Amazon. In the latest quarter, Alibaba reported a sizzling 55% jump in revenues to $5.14 billion and net income spiked by 66% to $1.14 billion.
While the bulk of BABA stock’s revenues came from ecommerce, the company has also been showing strong gains in other categories like cloud computing (revenues more than doubled to $224 million) and entertainment (the top line more than tripled to $541 million). Oh, and the company has continued to gain traction with mobile, which represented 79% of ecommerce revenues. In all, there are 450 million mobile monthly active users.
Granted, there are major risks to Alibaba stock. It can be tough to manage the complexities of an ecosystem, such as by dealing with issues like quality and customer service. Such things have dogged companies like eBay Inc (NASDAQ:EBAY).
At the same time, there are political issues. And this is not just about the uncertainty regarding the potential adverse reactions from the Chinese government. Of course, BABA stock is also vulnerable to Donald Trump — who has certainly not been shy about his anti-China policies. There could easily be higher tariffs and other adverse actions that could make it tougher for companies to engage in trade.
Kind of grim for Alibaba stock, huh? Perhaps so. But the conventional wisdom may actually turn out to be wrong. After all, Trump has taken a tough approach on Europe too. In other words, there may be more temptation for these countries to focus on China — moving away from the U.S. The same could happen in South America.
If so, China may wind up becoming an even more important economic power. And this seems reasonable since the country has a rapidly growing middle class, which iResearch Report forecasts will jump from 109 million in 2015 to a whopping 830 million by 2030.
What’s more, the population is rapidly going digital. Again, based on data from iResearch Report, the total retail e-commerce transaction volume in China is forecasted to go from $609 billion in 2015 to $1.46 trillion by 2020. That’s a compound annual growth rate of 19.2%.
According to InvestorPlace.com’s Dana Blankenhorn: “China’s consumers are hard-working, hungry for value and conservative in the best possible way. That’s because they’re all first-generation middle class. They treasure their new status, they’re very supportive of stability, and since they’re Chinese they’re numerous.”
Bottom Line on Alibaba Stock
Now, it’s true that Alibaba stock has been volatile. Since coming public in October 2014, the shares hit a high of $115 and a low of $59.
Although, at current levels, the valuation is fairly reasonable. Consider that BABA stock is at a forward price-to-earnings ratio of 24X. By comparison, Facebook Inc (NASDAQ:FB) trades at 25X and Baidu Inc (ADR) (NASDAQ:BIDU) sports a multiple of 31X.
But more importantly, when taking a long-term view, Alibaba stock looks like a good way to play the megatrends in China. What’s more, the shares may even be a hedge if Trump’s China policies ultimately backfire.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
