Alibaba Group Holding Ltd Could Be The Next Facebook (BABA)

Forget Amazon, Alibaba is more similiar to Mark Zuckerberg's social network

Alibaba Group Holding Ltd (NYSE:BABA) shares have been on quite a run so far in 2016. In fact, this month shares surged above $100 for the first time in over a year.

Analysts and traders often compare BABA to, Inc. (NASDAQ:AMZN) because of the two companies’ shared e-commerce and cloud services businesses.

When it comes to Alibaba stock, however, Facebook Inc (NASDAQ:FB) makes for a much better comparison. In fact, FB’s past could be a glimpse into BABA’s future.

Why Is Alibaba Stock on Such a Run?

Alibaba shares are now up more than 40% in the past three months. For a company with a market cap of more than $270 billion, that’s a major move. What’s driving the recent numbers? BABA’s incredible growth is showing no signs of slowing down. In fact, BABA’s impressive year-over-year revenue growth has accelerated to 39% and 59% in the second quarter and Q3, respectively.

Earlier this month, Brean Capital reported that Alisports registered 10 times as much traffic during the Olympics as it does on a typical day. The platform reached an audience of 3.8 billion live viewers during the games. Mobile viewers made up about 78% of that audience, PC viewers represented 20% and TV viewers represented only 2%.

Mobile Transition Is Key for Alibaba

For FB stock investors, the “transition to mobile” was a major concern following the stock’s highly anticipated 2012 initial public offering. FB’s early numbers as a public company mostly disappointed the market, which was looking for big earnings from the popular social network. Instead, FB saw that the future hinged on switching its focus from desktop to its mobile platform.

FB stock famously tanked during its first few months as a public company. It even dipped as low as $17.73, well below its $38 IPO price. Once FB’s investment in mobile and mobile advertising was complete, FB began turning around its quarterly numbers. The stock soon began its incredible multi-year run to new all-time highs above $13 per share.

BABA IPO investors are familiar with a similar path. After surging as high as $120 in its opening weeks, Alibaba stock soon fell more than 50% to as low as $57.20 during its mobile investment period. Much like FB, BABA’s numbers in the last two quarters seem to indicate that the company has turned a corner. Alibaba stock has followed suit, climbing within $11 of its all-time high this month.

Where Does Alibaba Stock Go From Here?

Wall Street analysts are starting to see the similarities between Alibaba stock and FB. This month, MKM Partners analyst Rob Sanderson said that FB and BABA’s transitions to mobile both happened more quickly than the market anticipated.

“For both co.’s, this was a deflationary shift in the early days until mobile monetization eventually caught up then surpassed desktop (this happened for BABA last quarter),” Sanderson wrote.

Like FB, mobile advertising could pave the way for long-term growth for BABA. The company  has excellent user engagement metrics that should continue to appeal to advertisers.

In addition, the stock has a potential near-term catalyst ahead as well. Many U.S. investors have been leery of BABA because they don’t trust the company’s numbers. Even if the current SEC financial probe of BABA turns up an isolated case or two of number-fudging, the clarification could reassure investors that the vast majority of BABA’s profits are legitimate.

Today, the top six institutional U.S. internet mega-cap investment funds are significantly underweight Alibaba stock. If BABA gets the “all clear” from the SEC at some point, those funds would need to buy roughly 800 million shares of Alibaba stock just to get equal weight.

Mobile monetization, institutional buying, accelerating revenue growth, a reasonable valuation and SEC-driven transparency could be just what BABA needs to repeat FB’s five-year run from $17 to $130.

In fact, that move may have already begun.

As of this writing Wayne Duggan was long BABA stock.

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