For the year so far, the stock chart for Alibaba Group Holding Ltd (NYSE:BABA) is certainly a standout. It’s mostly a steep upward slope, with the gain at about 60%. BABA stock has delivered at least double the returns of other mega techs like Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN).
But perhaps things have gotten overdone with Alibaba stock? Maybe it’s time to get cautious?
The fact is that there are notable risks. Alibaba gets much of its business from China, which has a dicey political system. At the same time, the company has been grilled about questionable accounting and counterfeit goods.
Yet such things have been issues for quite some time and BABA has found ways to manage them. More importantly, the company continues to find ways to pump up the growth ramp. In early June, CFO Maggie Wu noted that the top line for fiscal 2018 could jump by 45%-49%. Keep in mind that the Wall Street consensus was for 36%.
Okay, then, for investors looking at Alibaba, what are some of the other key factors to keep in mind for the bull case? Why are the shares worth the risk? Well, let’s take a look at three reasons:
BABA Stock Advantage #1: A Strong Moat
A key to the power of Alibaba is the inherent network effect. This means that the company’s platform gets more valuable as more people use it.
Note that BABA has 454 million active buyers on its retail marketplaces and 507 million monthly active users (MAUs) on its mobile platforms. So yes, it would likely be incredibly tough for rivals to encroach on this turf.
BABA CEO Daniel Zhang puts it like this: “If we use one sentence to describe Alibaba, Alibaba is an economy, driven by big data.”
But the company has also been smart to leverage its user base into other growth areas like video (with the Youku acquisition), cloud computing, and even entertainment. During the past two years, BABA has shelled out a hefty $21 billion in M&A deals.
But there have also been plenty of strategic venture investments — many of which have led to strong returns, such as with Weibo Corp (ADR) (NASDAQ:WB) and Momo Inc (ADR) (NASDAQ:MOMO).
BABA Stock Advantage #2: Digital Megatrends
The middle class in China is expected to reach 600 million by 2022. To put this into perspective, the total population in the U.S. is 320 million.
Already, China has the world’s largest retail market, at nearly $4.9 trillion. Of course, the growth rate in e-commerce is likely to continue at rapid pace. The expectation is that it will go from $470 billion this year to $839.54 billion by 2021. No doubt, BABA is in a great position to get an out-sized share of the opportunity.
But the company is also making moves to expand beyond China. Alibaba has taken a majority stake in Lazada, which is a top e-commerce operator in Southeast Asia, home to more than 600 million consumers.
BABA Stock Advantage #3: Solid Financials
The core of the business model for BABA is to charge transaction fees for purchases, which are often fulfilled by merchants. Because of this capital-light approach, the company has juicy margins. During the latest quarter, the adjusted EBITDA was $2.4 billion on sales of $5.6 billion.
And even though BABA stock has posted a strong run-up, the shares still fetch an attractive valuation. Consider that the forward price-to-earnings multiple is at 23X, which is reasonable in light of the expected strong rate of growth on the top-line.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including 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.
