Eleven months ago, Alibaba (BABA) began trading on the open market at an initial public offering price of $68. Alibaba stock closed on the first day of trading at $93.89 and hit an all-time high of more than $119 a few weeks later.
Currently BABA stock is trading at $69 per share, or roughly 20% below were it closed on the first day of trading back on Sept. 19, 2014 and almost 40% below its all-time high hit in November 2014.
A decline of that magnitude has many investors claiming Alibaba stock is a sell right now. Those making the bear case for Alibaba stock point out issues such as a weakening Chinese economy and BABA’s difficulty moving toward a profitable mobile platform.
While investors shouldn’t ignore these real challenges BABA is facing, I have three reasons why investors shouldn’t be overly concerned about China as a whole and more importantly Alibaba stock.
No.3 Reason to Buy Alibaba Stock: A Growing Middle-Class in China
In 2001 China’s middle class accounted for 15% of its population, a figure that grew to 23% or 243 million by 2009. Economists predict that figure will grow to 854 million or 93% of the urban population by 2030.
In 2009, it was also estimated that China’s middle-class only accounted for 4% of the global middle-class spending, making it the seventh largest in the world. But the Brookings Institute believes that by 2020, China could become the “world’s largest single middle-class market’, surpassing even the United States.
Additionally, it is believed that by 2030, 50% of China’s gross domestic product will be driven by consumption, as opposed to just 36% in 2014. So even though China’s economy may currently be slowing, its middle class is increasing. And as that portion of the population has more disposable income, consumerism, an area BABA sits in the middle of, is expected to take control of the economy.
Some critics, though, claim that while the middle-class in China is expanding, China’s lack of infrastructure and logistics issues will hurt Alibaba from getting merchandise to smaller cities and towns.
Investors need not worry, however, because Alibaba recently invested in the Suning Commerce Group, a brick-and-mortar retailer boasting a large presence in smaller cities throughout China. This investment will allow consumers to see physical merchandise before purchasing it online; but more importantly, it will broaden Alibaba’s logistics network.
The hope is to reduce delivery times down to as little as two hours through the use of Suning’s 1,600 locations, multiple distribution centers and delivery stations located all around China.
No. 2 Reason to Buy Alibaba Stock: Mobile Profitability Will Catch-Up to Mobile Usage Growth
In its most recent quarter, Alibaba reported revenue increased by 28% from the same period last year. Investors were disappointed by this because revenue had increased by 40% year-over-year during the previous quarter.
One reason for the slowdown in revenue growth is the increased use of mobile in China. BABA reported that during its latest quarter, more than 50% of its revenue came from mobile and that BABA’s mobile profitability is lower than its desktop profitability. Alibaba’s per sale commission from sellers on mobile came in at 1.73% during the March quarter, while the same metric for desktop was 2.63%.
Despite slowing sales growth and lower revenue per sale on mobile, Alibaba generated profit of $846 million from mobile devices, an increase of 352% from a year before. That was made as gross merchandise value purchased on mobile increased by 157% year-over-year. This indicates that Alibaba is increasing profitability from mobile faster than mobile sales are increasing.
Facebook (FB) was once dealing with a very similar issue — high mobile usage but slow revenue growth from mobile. Despite many analysts and critics claiming the problem would end Facebook, the company soon figured out how to make it work.
I believe Jack Ma and his team will do the same, but investors need to be patient, as it may take time.
No. 1 Reason to Buy Alibaba Stock: BABA Is Just Not an e-Commerce Company
Besides being the largest e-commerce site in China, Alibaba is becoming much, much more.
BABA recently entered the cloud computing arena, similar to Amazon (AMZN), and believes that within four years BABA can overtake Amazon’s cloud business, whether that is in customer technology or worldwide sales.
In the most recent quarter, Amazon reported $1.82 billion in cloud-computing revenue compared to just $63 million for Alibaba. So if Jack Ma’s team can succeed in overtaking Amazon, Alibaba stock will soar just from this one division.
You are also buying a piece of a finance business when buying Alibaba stock. Since 2004, Alipay has been Alibaba’s version of PayPal (PYPL). More recently, BABA started Yu’e Bao, a money-market fund in China with around $93 billion in assets as of the end of 2014. And in June, BABA announced that it would launch an online bank with the hopes to serve small businesses that are having difficulty obtaining loans through large banks.
In June, the world was informed that Alibaba would be introducing a streaming video service in China, which will be called Tmall Box Office. TBO will be a subscription-based service similar to Netflix (NFLX).
After looking at all the projections and projects Alibaba is taking on, looking at its current valuation of 26 times its trailing 12 months earnings and being valued at $176 billion, if just half of what the company is trying to do works, Alibaba stock is a screaming buy at today’s price.
As of this writing, Matt Thalman was long Amazon, Netflix, Facebook, and PayPal. Follow him on Twitter at @mthalman5513.
