Alibaba Group Holding Ltd (NYSE:BABA), the Chinese e-commerce leader that dwarfs the combined sales of Amazon.com Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) combined, is wooing U.S. businesses to its site with the promise of connecting retailers to the Chinese consumer.
Considering the scope of the opportunity, BABA stock is a strong buy at current prices.
According to Reuters, BABA is ramping up its efforts to partner with major U.S. retailers, the beginning phase of a long-term strategy to streamline commerce between the world’s two largest economies.
The Alibaba IPO in September saw hordes of investors flock to BABA stock. Raising $25 billion, Alibaba was the biggest U.S. IPO ever, and the commotion behind its offering sent BABA stock from its $68 offer price to $93 — a gain of 36% — before the stock even officially opened for trading on its first day.
But after soaring to levels as high as $120 in November, BABA stock has cooled down markedly and now trades below $100 per share.
That decline — coupled with the revelation that Alibaba is making the push to connect U.S. retailers and Chinese consumers — makes BABA stock look like a bargain buy right now.
Opening the Floodgates: Alibaba’s $291 Billion Opportunity
China’s expanding middle class now exceeds 250 million people, making it an obvious end-market for potentially explosive sales growth in the retail industry. Consider this alarming statistic from Reuters:
“Industry insiders point to just $15 billion in annual U.S.-to-China, cross-border consumer sales now. But Daiwa estimates cross-border purchases, which exclude sales of American products within the country, can grow to 1.8 trillion yuan ($291 billion) by 2020.”
If that doesn’t get BABA stock bulls running, I’m not sure what will.
To put the numbers differently, U.S.-to-China sales, in a matter of five years, are expected to rise a total of 1,840% — a compound annual growth rate of nearly 80% a year!
Even if those estimates end up being off by $100 billion, the upside potential is incredible; clearly we are looking at a relatively untapped market with huge opportunity, and BABA is easily the company best-suited to broker the transactions.
Firm roots in China mean the company is well-accustomed to Chinese regulations, which AMZN and EBAY will need to navigate and learn as they go. But the biggest advantage Alibaba has over its American peers in the courtship of the Chinese consumer is … well, an incredible influence over the Chinese consumer.
In 2009, Alibaba single-handedly revived a decades-old celebration of single college students, Singles’ Day, and turned it into a sales holiday. Last year, Alibaba facilitated $9.3 billion in sales on Singles’ Day alone, dwarfing Black Friday sales in the process.
A deep familiarity with the ways of China also importantly puts BABA in the role of a cultural advisor, able to provide U.S. retailers with suggestions about styles, fashions and color schemes that will sell better in Asia.
As for Alibaba’s Chinese rivals, Daiwa analysts say the biggest competitive advantage is the unprecedented logistics and distribution network called ePass that BABA has in place — something fellow retailers like China’s JD.Com Inc(ADR) (NASDAQ:JD) can’t yet duplicate.
This opportunity is too large for U.S. businesses to ignore, and the economic upside to established access to the Chinese market ensures that retailers will be eager to partner up. Already, Macy’s, Inc. (NYSE:M) and Aeropostale Inc (NYSE:ARO) are among companies that have signed up with Alibaba and Alipay.
BABA’s recent pullback makes the stock a resounding buy in the face of Alibaba’s recent push.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid.
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