It has been a big year for Chinese e-commerce firm Alibaba Group Holding Ltd (NYSE:BABA). After a better-than-expected first quarter, BABA stock gained roughly 10%, bringing the firm’s total growth so far this year into the triple digits. Now, investors are not only comparing BABA to Amazon.com Inc. (NASDAQ:AMZN), but they’re saying it’s poised to perform even better.
When you take into account the risks associated with buying a Chinese company like Alibaba, I’m not sure I’d agree that it’s a better buy than AMZN. However, based on the firm’s performance and possible growth catalysts for the future, there’s a good case for the stock to make its way above $200 per share before the year is over.
Alibaba Has Strong Fundamentals
There are a lot of reasons that buying a Chinese company is risky — cultural differences when it comes to trading or worries about transparency and stability in within China’s economy, for example — but if you’re going to take the plunge, you want to choose a firm with a strong balance sheet. BABA stock offers that to investors.
The most recent quarter showed that Alibaba’s revenue rose 56% over the past year with almost all of its business units reporting strong growth. BABA has been spending heavily on investing in its future, but even with that outpour of cash, the firm still brought in $2.1 billion worth of profit.
Not only is BABA growing exponentially, the firm doesn’t actually have that much debt. The firm’s long-term debt ratio stands at just 25.67%, far lower than peers like AMZN, Baidu Inc (ADR) (NASDAQ:BIDU) and eBay Inc (NASDAQ:EBAY). Alibaba’s financials suggest that CEO Jack Ma is running a tight ship and the firm will likely weather any turbulence brought on by the Chinese economy.
Growth Catalysts
The best reason to buy BABA stock is the incredible growth opportunity it offers. The company is working on several projects that are likely to carry Alibaba forward into the next decade, but even without things like cloud computing and international expansion, Alibaba’s e-commerce platform isn’t even close to saturating China’s market yet.
China is home to the world’s largest retail market, and e-commerce makes up only about 15% of that market right now. As more and more people shift toward online shopping, Alibaba is preparing itself to become a one-stop shop for everything e-commerce, much like Amazon did in the U.S.
BABA has been able to capture a huge percentage of China’s internet users, making it impossible for brands to ignore its online marketplace. Monthly active users made their way toward 530 million last quarter. That’s a big deal because just over half of China’s population uses the internet — roughly 750 million people — so BABA is engaging about 70% of the country’s internet users. As more people come online, Alibaba’s value proposition will be even stronger because the firm will have a wider selection of goods.
New Projects
Outside of growing alongside China’s internet usage figures, BABA stock has a lot of new projects that are likely to set the firm up for growth throughout the next decade. Alibaba’s cloud computing business has been gaining momentum rapidly — the most recent results showed that revenue was up 96% and paying customers surpassed the 1 million benchmark.
At the moment, BABA’s cloud arm makes up only a small fraction of the firm’s overall revenue, but with cloud computing expected to experience particularly strong growth over the next decade, it’s fair to assume that percentage will rise substantially over the next few years.
Then there’s the firm’s international expansion efforts. While I’ve written before about my concerns that BABA won’t make it out of Asia, the company appears to be making major strides toward becoming a more international brand. Not only has BABA been working to connect American companies with Chinese consumers, but the firm recently inked a deal with Marriott International Inc (NASDAQ:MAR) that will allow Chinese travelers to book and pay for a Marriott room anywhere in the world by using Alibaba’s platform.
That’s a big deal for two reasons. First of all, it puts BABA in touch with a U.S. powerhouse and builds a relationship that could be useful for the firm if it does try to make its way across the pacific.
However, more importantly it opens Alibaba up to the fast-growing world of online travel. Marriott is the world’s largest hotel chain and China’s growing middle class is expected to take 700 million trips over the next five years, so this partnership is a pretty great way to dip a toe in that industry.
The Bottom Line for BABA Stock
Alibaba is delivering impressive growth right now, and the returns are likely to continue as the firm expands. Buying Alibaba shares doesn’t come without risks, but the upside is too sunny to ignore. Not only that, but BABA stock trades at 25 times its forecasted earnings, not far over the S&P Information Technology benchmark and markedly lower than its American counterpart AMZN.
While Alibaba has already provided shareholders with triple-digit returns so far this year, the firm still has higher to climb and makes for a great buy right now.
As of this writing, Laura Hoy was long AMZN.
