Alibaba Group Holding Ltd (NYSE:BABA) has been on a tear lately. Note that the shares have logged an impressive 32% gain for the year so far.
Yet can BABA stock keep up the momentum? Or is it time for some profit taking?
Well, gauging the short-term moves of a stock is never easy. But for investors with a long-term bent, I think BABA stock remains a pretty good play.
The company is certainly positioned nicely for the secular trends in China. According to Statista, the market for ecommerce is expected to hit $840 billion by 2021, which would be nearly twice the size of the U.S. market. Keep in mind that the population of the middle class in China is over 300 million — and it is expected to grow.
As for Alibaba, it has a tremendously powerful platform, which includes assets like Taobao and Tmall. The company has also been adept in its move to mobile, with MAUs (monthly active users) at 493 million (as of the end of 2016), up 43 million on a quarter-over-quarter basis.
Another key driver for BABA stock is that the company has a marketplace model, which means low capital investments and hefty margins. In the latest quarter, revenues shot up by 54% to $7.7 billion and net income came to $2.5 billion. To put things into perspective, the total online sales in China grew at 26% last year. So yes, BABA is gaining market share.
Yet when it comes to BABA stock, it is important to realize that the company is more than just about ecommerce. In fact, it has emulated the Amazon.com, Inc. (NASDAQ:AMZN) model by leveraging the core infrastructure.
For example, BABA stock has a thriving cloud-computing business, which appears to be still in the early phases of the growth ramp. During the latest quarter, the revenues spiked by 115% to $254 million and the customer base hit 765,000.
Although, Alibaba’s cloud business is moving beyond China. Consider that the company is making heavy investments in Japan, Germany, Australia and parts of the Middle East.
OK then, so how large can the BABA cloud business get? Interestingly enough, according to analysts at MKM Partners, the value could reach anywhere from $65 billion to $70 billion over the next five years.
Next, the company also has a fast-growing entertainment segment. Granted, this seems to be non-core to BABA. But hey, in the digital world, a massive online platform – like AMZN, Facebook Inc’s (NASDAQ:FB) or Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) – can be leveraged across many areas. This is about the inherent power of a large and engaged user base.
As for BABA’s entertainment division, the growth has been torrid. In the latest quarter, the revenues skyrocketed by nearly 3X to $585 million. A key part of this has been making aggressive investments in premium content as well as building out the streaming infrastructure (through its Youku Tudou App).
The Chinese market is certainly a massive opportunity for entertainment. For example, during the next few years, the country will likely become the world’s largest box office. Consider that there are over 25 new movies screens added every day!
Bottom Line on Alibaba Stock
There are definitely plenty of notable risks with BABA stock. The political environment in China can be volatile, especially in regards to video content. But BABA continues to have questions about the transparency with its accounting (the company is currently under a Security and Exchange Commission investigation) as well as counterfeit goods on its marketplaces.
BABA stock could also be weighed down by the intense competition. Perhaps the biggest threat is Tencent, whose WeChat app could be a tremendous vehicle for ecommerce. Keep in mind that the company has a major strategic relationship with JD.Com Inc(ADR) (NASDAQ:JD).
Despite all this, BABA management has a long history of dealing with the nuances of the Chinese markets — which is no easy feat. And of course, the company understands how to build highly successful online businesses. In other words, for investors looking for a growth play on China, BABA stock looks spot-on.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
