I’ve written before about why Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE:BABA) is a risky play. BABA stock has been on a tear over the last six months as more analysts compare the firm to Amazon.com, Inc. (NASDAQ:AMZN) when the U.S. e-commerce juggernaut set up shop.
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I still think Alibaba stock is a risky addition to investors’ portfolios; however, some new developments suggest that taking the plunge on the stock might be worth it.
One of the major reasons I have been skeptical on BABA stock is the company’s lack of an international expansion plan. At the moment, Alibaba only operates in Asia and it’s unclear exactly how the firm plans to broaden its horizons. Not only does this concern me from a future growth standpoint, but it also worries me on a macroeconomic level.
BABA Stock: A Risky Business
Alibaba investors are hugely dependent on the success of the Chinese economy. That’s troubling because China isn’t exactly known for being transparent when it comes to reporting economic data. Pressure on Beijing to meet targets and produce robust numbers is higher than ever, and many analysts believe that some of the country’s figures have been inflated over the past few years. Not only that, but even if the economic data isn’t entirely accurate, it still doesn’t paint the country in the best light.
However, it would be silly to overlook a stock like Alibaba just because the firm is solely dependent on China right now. BABA stock also has a lot going for it as well.
For one thing, Alibaba has sky-high aspirations. The company has spent $21 billion on strategic acquisitions over the last two years, and many of those purchases look great from a growth standpoint. BABA is planing to become more than just an e-commerce business and the firm looks poised to become China’s next YouTube and Twitter Inc (NYSE:TWTR) in addition to being a leading e-commerce provider.
Not only that, but the firm has been working to grow its cloud computing arm as well. Revenue from cloud computing was up 103% in the firm’s most recent earnings report. That’s a huge increase and it bodes well for BABA stock’s future.
Alibaba’s International Partnerships
While BABA stock’s moves outside the retail space are enticing, its developments within the firm’s e-commerce business that I find most intriguing. Alibaba recently announced new partnerships with Driscoll’s and Chicken of the Sea that will allow the companies to sell strawberries and canned fish to Chinese consumers via the online platform.
What’s good about U.S. firms partnering with BABA is that it gives the company a leg up against competition from companies like Amazon that have more international ties.
While it’s still unclear whether Alibaba will ever make a sizable dent outside of China, the firm may not have to continue delivering outstanding growth. According to CEO Jack Ma, BABA will be selling $1 trillion worth of products on its site by 2020. By 2036, he predicts that the site will support 10 million businesses.
By offering American-made goods, BABA is catering to China’s rapidly increasing middle class, something that will help the firm continue to grow within Asia. China’s retail market is the largest in the word, worth $4.89 trillion, so the firm will have plenty of room to grow within the country over the next few years.
Bottom Line on Alibaba Stock
Not only has BABA stock had some interesting developments that make the company look more promising, but it’s also pretty cheap when you consider its growth estimates. Alibaba’s revenue is expected to grow by between 45% and 49% this year and it would be reasonable to expect earnings growth of at least 50% in the coming 12 months. Since the stock is trading at just 31 times its forward earnings, it looks pretty cheap.
BABA stock definitely carries more risk than its American counterpart AMZN, but with that said, it also offers a much larger growth potential if you’re willing to overlook its potential downfalls. I’m still skeptical about the firm’s ability to make it outside of China, but it’s possible that international growth won’t be an issue for the next decade. BABA certainly has a lot of potential, and it is worth considering.
As of this writing, Laura Hoy was long AMZN.