Can Alibaba Group Holding Ltd (BABA) Stock Keep Setting New Highs?

Alibaba Group Holding Ltd (NYSE:BABA) is coursing higher on Tuesday to fresh all-time highs, up more than 2% to bring its year-to-date gains above 35%. BABA stock recently cleared its former highs around $115, and are making a beeline to $120 and possibly beyond.

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But like many other tech stocks, Alibaba looks a bit hot right now. The question becomes, then, can shares sustain their lofty valuations?

Alibaba stock currently changes hands for 53 times earnings, 14 times sales and just less than 8 times book. Its price/earnings-to-growth ratio of 55 dwarfs the PEG of 5 sported by, Inc. (NASDAQ:AMZN). EV/EBIT and EV/EBITDA multiples of 35 and 33, respectively, should raise some eyebrows, too.

At these valuations, even some who believe in Alibaba’s long-term growth potential should rightfully fear a reversal.

Admittedly, Alibaba is no Amazon that operates on fairly thin margins. Instead, the company reminds me more of Facebook Inc (NASDAQ:FB) … though some, such as famed short seller Jim Chanos, doubt Alibaba’s accounting. But analysts don’t seem to share his skepticism — of the 45 analysts covering BABA stock, 41 say it’s a “Buy” or “Strong Buy.”

Those bullish on Alibaba cite those high margins as a reason for buying, but again, can these be sustained over time? High profits tend to attract competitors, bringing margins back down.

Alibaba isn’t alone, you know, even in China — home of social-gaming giant Tencent Holdings Ltd. (OTCMKTS:TCEHY), search engine Baidu Inc (ADR) (NASDAQ:BIDU) and Alibaba rival Inc(ADR) (NASDAQ:JD). As I mentioned last year, Tencent and JD began an alliance in 2014, and Tencent now owns 21.25% of JD.

Tencent also owns WeChat, the messaging app with 768 million daily users. And Arthur Kwong of BNP Paribas is bullish on Tencent rather than Baidu and Alibaba.

Tencent has laid siege to Alibaba in two areas: payments and cloud computing.

Will competition in these areas be tougher than Alibaba imagined?

Cloud Computing

Alibaba’s cloud business is still small, bringing in $254 million in revenue (3.3% of BABA’s sales) in the fourth quarter of 2016. But cloud computing is growing fast (Alibaba’s cloud revenues were up 115% year-over-year), and BABA stock holders bulls hope that will bring shares higher with it.

With $12 billion in sales and a 40% market share, Amazon Web Services dominated cloud computing in 2017. Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOGL) and International Business Machines Corp. (NYSE:IBM) account for another 23% of global market share. Alibaba placed sixth, behind the aforementioned and, Inc. (NYSE:CRM).

Two years ago, Alibaba set a goal of overtaking AWS in four years, but AliCloud remains a minor player globally, and its sales are a fraction of Amazon’s.  

Tencent is catching up, however. While AliCloud’s 115% revenue growth is nothing to sneer at, Tencent’s cloud revenues more than tripled in 2016.

And TCEHY is not only competing against Alibaba for the cloud services market in China, it also is expanding overseas. Tencent recently opened a cloud data center in Silicon Valley, becoming the second Chinese company to do so (after Alibaba). Tencent also plans to open more data centers in Mumbai, Seoul, Moscow and Frankfurt.

Mobile Payments

Alibaba’s affiliate Ant Financial (which owns Alipay) still dominates payments in China, but its lead appears to be shrinking as Chinese spend more time on WeChat and use its payment service.

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Indeed, 50% of WeChat users spend over 90 minutes a day on the app. On WeChat, users can hail cabs, play games, send their friends money and order food.  

A few years ago, Alipay accounted for over 80% of mobile payments in China by gross merchandise volume (GMV), while Tencent’s Tenpay could only boast a 10% market share. But according to the consulting firm Analysys, Alipay’s market share fell to 54% while Tencent’s rose to 37% in the fourth quarter of 2016.

Global brands realize WeChat’s potential and are inking deals with Tencent. In December, Starbucks Corporation (NASDAQ:SBUX) agreed to accept Tenpay at 2,500 locations in China and WeChat rolled out a feature enabling users in China to buy Starbucks drinks for their friends. A Tencent executive hopes to have Tenpay in every shop in China within two years.

WeChat is also going international, working to enable payment via Tenpay at locations in Europe and expanding to the U.S.

Bottom Line on BABA Stock

It looks like Tencent is catching up, and Alibaba will have to step up its game.

Of course, not all is going well for Tencent. Tencent’s mini programs didn’t do so well, and Apple’s (AAPL) regulations recently forced Tencent to disable a feature where WeChat users could send content creators tips on WeChat for iOS.

But if Tencent can keep it up, assumptions about Alibaba’s future profitability might need to be re-examined. Vigorous competition might erode BABA’s profits and hurt the stock. 

Given this tough competition from Tencent, can Alibaba’s rich valuation be sustained?

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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