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Will the Honeymoon End for Alibaba Stock? (BABA)

Alibaba stock has had nothing but success so far since its record IPO, but obstacles loom ahead

Chinese e-commerce sensation Alibaba Group Holding Ltd. (BABA) faces potential difficulties even as it basks in the glow of a string of good news.

alibaba stock baba stockAlibaba just did a titanic $8 billion bond offering, which drew large amounts of investor interest much as its recent IPO did. Bond buyers clamored to get in on the debt offering, with as much as $55 billion placed in orders.

Alibaba stock rocketed the company into public consciousness back in September when it debuted to hungry investors at $68 a share and rose quickly to $93. Yet as BABA stock prospers, the difficulties of higher expectations grow.

What has made Alibaba stock so appealing to Wall Street? The combination of a hot company with charismatic founder and leader Jack Ma, who enjoyed a lot of favorable buzz, along with a well priced IPO, did the initial trick.

Ma dazzled even hard-edged Wall Street pros with his dynamic simplicity. In an interview with CNBC’s David Faber, Ma elegantly understated his business philosophy, what he aims to deliver: “All the consumers are the same — they want  new things, they want cheap things, they want good things, they want unique things.”

Since the immediate aftermath of the historic IPO, Alibaba stock backtracked a little before eventually taking off to $120 then retreating again to where it trades now, in the $110 range.

So with a dazzling IPO, Alibaba stock didn’t suffer from the woes that Facebook Inc. (FB) famously did, when its price fell as much as 50% after it went public.

Alibaba’s first earnings release since going public in the U.S. market showed a 53.7% increase in revenue and a 15% increase in net income.

Alibaba Stock: Prospects

It’s been said by Ma himself, as Faber pointed out on CNBC, that the Alibaba executive chairman is feeling the pressure for his company to perform. After all, with a blockbuster IPO and the new scrutiny of the harsh eyes of Wall Street, the market seldom forgives missteps or failed expectations.

Alibaba stock’s valuation highlights some of the expectations. Alibaba stock trades at about 55 times earnings, and about 35 times forward earnings. Revenue is projected to grow according to analyst estimates by almost 50% next year, earnings by 33%.

You get the feel for the heavy expectations and pressure with numbers like that. After all, Alibaba is still a neophyte on Wall Street, and though it’s regarded by many as a profitable Chinese version of Inc. (AMZN), others aren’t so sure. Skepticism has largely evaporated since the IPO, but a stumble in revenue or earnings growth would likely be punished by the market.

Alibaba Stock: The Dominant Player

With 80% of the market share in China, BABA dominates the market in a way that defies easy comparison. Alibaba has its Taobao platform for online shopping, which sells search ads to retailers. Alibaba has a robust consumer marketplac, with its huge retail presence, but it also has a vigorous online business-to-business marketplace.

Ma makes the distinction that Amazon and eBay Inc.(EBAY) are e-commerce businesses, but that Alibaba really isn’t, as it neither holds goods nor warehouses them, instead it connects buyers with sellers.This connectivity is at the heart of how Ma sees his mission to keep BABA growing. Also, Ma maintains, Alibaba’s online business is more central to China’s retail economy than online business is in the U.S.

With the recent retail blowout of a reported $9 billion in Singles’ Day sales, it looks as though Alibaba stock has everything going its way for now. Even if the reported sales are highly discounted and turn out to be less on an actual cash-paid basis, it’s an impressive performance for a company that was projected to do $12 billion in revenue for its entire fiscal year.

Alibaba stock BABA

Alibaba Stock: The Future

Despite the Single’s Day sales and both the successful IPO and debt offerings, the subsequent quarterly reports will be critical for Alibaba stock. As the quarters go by and projections for revenue and earnings get ratcheted up, it’s likely that BABA won’t always be able to stand up to this constantly rising bar. Most growth stocks hit some inevitable bumps. Neither stocks nor markets go straight up indefinitely.

Traders will be able to move in and out of BABA stock with future market moves, but for long term growth investors we’re strongly bullish on Alibaba stock as well. Ma is relentless in his quest to build something enduring with Alibaba. Investors should still try to find a price point that is reasonable to pay for that growth. Then they should buy.

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

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