A sense of doubt once crept into investors’ minds when it came to Alibaba Group Holding Ltd (NYSE:BABA). After hitting $120 in late-2014, one of the world’s largest companies had suddenly fallen about 50% by early 2016. But that didn’t mark the end of BABA stock.
Now trading at $154, shares are up a whopping 156% since those lows. A bulk of those gains have come in 2017, as Alibaba stock is up 75%. Even in the last three months, shares are up 33%. What’s driving the rise? A strong underlying business.
BABA Stock: Looking Under the Hood
Revenue growth has been absolutely stunning. Its fiscal 2017 revenue doubled — yes, doubled — that of its 2015 sales results. It’s up 56% from 2016. The sales growth here is absolutely jaw-dropping. If this were a small-cap stock, it’d be impressive, but not unheard of. But BABA stock trades with $390 billion market cap. When Amazon.com, Inc. (NASDAQ:AMZN) traded with a similar market cap, investors cheered revenue growth of 20% or more.
The fact that it’s accelerating is even more impressive.
Last quarter, fourth-quarter sales of $5.61 billion grew 59.8% year-over-year. Last year’s fourth quarter? Up less than 32%. Its core business was the slowest grower last quarter, boosting sales “just” 47%. Cloud-computing was up 103% year-over-year, while digital media and entertainment had a 234% gain. It’s full-year results for the cloud and digital media were even stronger, growing 121% and 271%, respectively.
For this current fiscal year, analysts expect BABA to grow sales another 46.4% and an additional 32.6% in fiscal 2019. On the earnings front, analysts forecast growth of 31.4% and 34% for the next two years, respectively. The only thing Alibaba needs is for its margins to expand in the process and then investors will really pay top-dollar.
Alibaba stock is working with a huge tailwind. Although its business is not quite the same as Amazon, the two are riding the same wave. E-commerce is driving mega growth across multiple segments.
Without getting too off-course, AMZN and BABA stock aren’t the only winners. Look at Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) or the Chinese equivalent Baidu Inc (ADR) (NASDAQ:BIDU). Both are benefiting from more online searching and higher ad revenues. Consider companies like Tencent Holdings Ltd (OTCMKTS:TCEHY), PayPal Holdings Inc (NASDAQ:PYPL) and Square Inc (NYSE:SQ), the latter two of which are up 52% and 90% so far in 2017, respectively. Even credit card companies like Visa Inc (NYSE:V) and MasterCard Inc (NYSE:MA) are enjoying big successes. Why? Because you can’t pay in cash when you’re ordering online!
What About Valuation?
The valuation for Alibaba is questionable on the surface. BABA stock trades with a price-to-earnings ratio of 62, a forward P/E of 25.2 and 16.6 times sales.
But you may notice something quite important in these numbers: the forward outlook. 62x earnings is a very high valuation; 16.6x sales is too. But a forward P/E ratio of 25? Not that bad. Given the type of growth numbers that Alibaba is putting up, one could even make a case that the stock is undervalued (although I will not make that argument).
In that sense, it reminds me of Facebook Inc (NASDAQ:FB). Shares trade at a high trailing P/E multiple and a high price-to-sales valuation. But on a forward earnings basis, shares actually look pretty cheap. Margins are on the rise at FB, too. If that were the case with BABA stock, it would be a buy, buy, buy!
That said, investors who are long should stay long. The business has never been stronger, the forward-looking valuation is compelling and Alibaba has big secular tailwinds at its back. There’s nothing wrong with taking a profit, but this horse has more race left in it.
Trading BABA Stock
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So if investors who are long should stay long, what should new investors do? Certainly do not short Alibaba stock. That’s a recipe for disaster. After tagging $160, shares are pulling back. However, they remain in a strong uptrend.
Short-term investors can try waiting for a pullback to the 21-day moving average near $148. That would be about a 3.5% pullback from current levels. Should that level hold, a new high seems likely. If it fails, the 50-day moving average is another good spot to buy or add at.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in V and MA.
