Buy Alibaba Group Holding Ltd (BABA) Stock Now, Worry About Valuations Later

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Bloomberg’s headline last week about Alibaba Group Holding Ltd (NYSE:BABA) says it all — “Alibaba Adds $7.5 Billion in Market Value After Raising Forecast.”

Buy Alibaba Group Holding Ltd (BABA) Stock Now, Worry About Valuations Later

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It leaves little doubt about the quality of its third-quarter 2016 earnings report that sent Alibaba stock above $100 for the third time in its brief 28-month history as a public company.

Other InvestorPlace contributors have already covered the highlights of BABA’s successful quarter, so I won’t dwell too much on the specific numbers. Rather, I thought I’d examine where Alibaba stock might be headed considering that its business is still very much in growth mode.

Where Alibaba Stock Is Headed

Dana Blankenhorn sees BABA hitting its all-time high of $120 in the near future despite its rich valuation, because there are very few growth stories out there as compelling as “The House That Jack Built,” including Jeff Bezos’ $400 billion behemoth.

Sure, Alibaba stock is perceived by some to be a one-trick pony generating 80% of its revenue from Chinese commerce, but Blankenhorn reminds readers that it’s so much more than that and when the various pieces of its business get built out and mature, you’ll wish you had bought at $102 where it’s currently trading.

How can you argue with logic? You can’t and I won’t. I’m old enough to remember when Amazon.com, Inc. (NASDAQ:AMZN) faced the same concerns from investors about a lack of revenue diversification and along came the cloud and it was off to the races.

An example of how Alibaba is using its e-commerce expertise for future growth are two potential investments the company will make in traditional retail: The first is a 35% stake in Sanjiang Shopping Club, a Chinese grocery store chain that will leverage Alibaba’s know-how to improve the shopping experience for its customers; the second move is its $2.6 billion offer to acquire the Intime Retail Group, a Chinese department store operator that owns 29 department stores and 17 shopping malls.

Both Bezos and Ma have come to the same conclusion that e-commerce can be more successful, not less, by having brick-and-mortar stores to provide a truly omnichannel shopping experience for its customers.

Retail today is about meeting your customer where they are 24/7; while it seems young people do nothing but stare at screens all day (smartphone, tablet, desktop, TV), millennials actually prefer shopping in a physical store (70% according to 2016 CBRE survey) rather than online.

Millennials will do research online when looking to buy something, but when push comes to shove they’re interested in going to the store first to try it out and then take it home once they’re sold. That’s great news for car dealers.

What does any of this have to do with the headline?

Recently, I suggested that BABA stock investors might want to protect themselves from the swoon in Alibaba stock, something that’s happened early in both the 2015 and 2016 calendar years. History repeats itself.

Four of the most expensive words in the English language are “this time it’s different,” often said by investors when defending an investment that’s incredibly overvalued and due for a fall — think real estate around 2007.

In the case of Alibaba, I wasn’t suggesting that Alibaba stock wasn’t a buy. Rather, I was simply providing some options on how to play BABA stock given the trading pattern it’s established since its IPO.

The simple fact is that Alibaba generated $2.5 billion in net profit in Q3 2016, $4.9 billion in non-GAAP free cash flow and $7.7 billion in revenue. That’s a huge company on its own without adding the other three quarters on top of it.

If ever there were a stock that could break free of its technical analysis shackles, Alibaba stock would be it. Is this time different? Alibaba’s latest earnings report suggests it is. So, buy away. Valuations be damned.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/buy-alibaba-stock-now-worry-later/.

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