Do you, like me, think Amazon.com, Inc. (NASDAQ:AMZN) is in a bubble right now? Are you in the same camp as Goldman Sachs, which believes Apple Inc. (NASDAQ:AAPL) and other tech stocks are in a bubble? Well, don’t go anywhere near Chinese stocks, then.
Alibaba Group Holding Ltd (NYSE:BABA) surprised analysts at its investor day by predicting revenue growth of 45%-49% this year, implying total revenues of $34.3 billion, and the stock was off to the races in early trade on June 8.
This made at least one American investor very happy. I picked up some Alibaba shares last November at about $93 each. By 10 a.m. Thursday, they were trading in New York at $140 each, up over 10% overnight.
Even if Alibaba hits its targets, investors were paying $350 billion in market cap for those $34 billion in sales. Alibaba, however, is not a retailer, as Amazon is. It’s more of a facilitator, offering services between producers and consumers. It’s more like Alphabet Inc. (NASDAQ:GOOGL), which sports similar margins of 25% and is also trading at 10 times revenues.
Party Like It’s 1999
Other Chinese Internet stocks traded up in sympathy. Baidu Inc. (ADR) (NASDAQ:BIDU) has a market cap of more than $60 billion when it expects $10 billion in revenue. JD.Com Inc(ADR) (NASDAQ:JD) is up 5% and has a market cap of about $57 billion with revenue of under $20 billion … and JD is a retailer.
In reaching these valuations, bears suggest, China is combining the dot-com boom of the 1990s with the present cloud boom. Chinese investors are less sophisticated than Americans, they’re younger and haven’t had money for long, and their last stock market crash was less than two years ago.
InvestorPlace writers have been pounding the table for Alibaba for some time. Joseph Hargett calls Alibaba “the REAL e-commerce giant.” Will Ashworth recently found three great reasons to love the stock despite its earnings miss last month. Lucas Hahn compared it to Facebook Inc (NASDAQ:FB), with its fat, fat margins.
While it’s normal to write that Alibaba=Amazon, many comparisons between Alibaba and Amazon are specious and overwrought.
Alibaba’s payment arm, Ant Financial, is far more aggressive than Amazon and is buying Moneygram. The company has invested in some blockbuster movies Amazon wouldn’t touch, including the latest Star Trek and Mission Impossible features. It is super-aggressive in fintech and Ant is a big investor in Paytm, India’s mobile payments giant.
China’s Internet sector is as fresh as America’s was in 1999 but is consolidating more rapidly, meaning it’s more like our present Internet sector.
Baidu dominates in search. Tencent Holdings Ltd. (OTCMKTS:TCEHY) has quickly moved from games to chat and is worth even more than Alibaba, with investors paying $360 billion for a company that did $7.2 billion in revenue for its last quarter and is not traded in the U.S.
Sell, Right?
I would hesitate to ring the cash register on the China bubble just yet.
For one thing, there’s more sustaining it, a domestic growth rate of 6%. Second, there’s more surrounding it, markets like India and Southeast Asia that are growing even faster than China itself. Third, there’s less competition, with only Amazon offering anything like a serious challenge, and other U.S. cloud operators content to stay in their lanes.
East Asia has become the global economy’s growth center, with political stability, demographics, and shining infrastructure Americans can only dream of. Yes, Alibaba is in a bubble and, yes, it will probably fall at some point in the future. But it’s in a younger market and is going to get up faster.
If you’re into growth, this is a bumpy ride you don’t want to miss.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, BABA, and FB.
