Alibaba Group Holding Ltd (NASDAQ:BABA) is part of a distinguished group. For investors in foreign stocks, this has been the year of China, and BABA stock is one of the leaders. Year-to-date, 16 Chinese stocks are up 100% or more. Alibaba just hit the list itself. With its recent gains, it’s now up 102% on the year.
Regardless, China is putting up rock star numbers in 2017, Alibaba included. Perhaps most importantly to Jack Ma, BABA stock is outpacing chief rival JD.com Inc(ADR) (NASDAQ:JD), which is up just 55% on the year.
BABA Stock Cons
JD Isn’t Going Anywhere: Many Western investors think of Alibaba as the Amazon.com, Inc. (NASDAQ:AMZN) of China. The analogy works in some ways. For example, both aren’t just retailers, they also have huge cloud businesses and various other disruptive side projects. Alibaba is the leading internet conglomerate in China, just as Amazon is in the United States.
However, within retail, Alibaba is actually closer to eBay Inc (NASDAQ:EBAY) in that it primarily serves as a marketplace for third party vendors. Yes, Alibaba does direct selling as well, but it isn’t their primary business. Alibaba has gotten a bad reputation with some clients due to the prevalence of low-quality and fake merchandise on its site. JD.com, Alibaba’s biggest competitor, is putting up huge growth, 50% year/over/year with its focus on high-quality merchandise and fast cheap shipping.
Logistical Issues: Some folks think Alibaba is a fraud or at minimum is materially misstating its books. See this from Australian fund manager John Hempton, which includes some thought-provoking reasoning along with alarming photos of Alibaba’s less-than-Amazon level warehouses. For what it’s worth, famous short seller Jim Chanos suggested last year that Alibaba’s accounting is as opaque as Enron’s was.
But let’s get back to logistics. Alibaba primarily relies on Chinese delivery firms along the likes of FedEx Corporation (NYSE:FDX) in the US for customer deliveries. This will become increasingly problematic for Alibaba going forward. The quality and reliability of these services varies widely within China. JD, realizing this, built out the country’s leading logistics system to ensure customer satisfaction. JD is now leading the way in Chinese drone delivery of packages. In many ways (including this one), JD looks more like China’s Amazon than Alibaba.
Expensive Stock: Even assuming you fully buy into Alibaba’s accounting including its off-balance sheet vehicles, the stock still looks expensive. The stock trades at 60x this year’s earnings, though a more reasonable 27x next year’s if you buy analysts’ consensus estimate.
Still BABA stock is pricey, trading at a jaw-dropping 17x sales. Even Amazon, which is rarely called a cheap stock, sells at just 3x its sales. Is a dollar of Alibaba revenues worth almost five times as much as a dollar of Amazon’s sales? BABA stock bears would emphatically say that they aren’t.
BABA Stock Pros
That Growth Rate: The bullish counterpoint to the previous con is simple. Look at that growth rate. Earnings are set to shoot up from less than $3/share over the past 12 months to almost $7 over the next 12. A 100%+ growth rate is impressive for any firm. It’s downright incredible for a company produces $27 billion a year in revenues and sports a nearly half-trillion dollar market cap.
And there is no sign that Alibaba is slowing down. Just the opposite, in fact. The company grew revenues 40% in 2014, 45% in 2015, and accelerated to 54% for 2016.
It’s Huge: In April 2016, Alibaba became the largest retailer in the world, as long as you count third-party sales and not just Alibaba’s direct revenues. You might imagine Amazon.com was the biggest retailer, but in fact, Alibaba had already passed them quarters ago. No, Alibaba toppled the big dog itself, Wal-Mart Stores Inc (NYSE:WMT). Wal-Mart may be omnipresent in more than two dozen countries, but as of last year, Alibaba now accounts for even more retail activity in total.
As of last year’s data, Alibaba accounts for more than half of Chinese online retail activity and also more than half the packages that pass through the Chinese postal service. The company has nearly half a billion monthly active users holds the dominant position in China.
International Expansion: Historically, Chinese consumer brands have struggled to gain widespread acceptance outside of Asia. However, the success of Apple, Inc. (NASDAQ:AAPL) and its Chinese-manufactured iPhones may be helping to reshape consumers’ feelings toward China-produced goods and services.
In any case, Alibaba is heavily investing outside of China. The latest news came last week. Brazilian newspapers reported that Alibaba is considering selling electronics in Brazil. This news alone was enough to send leading Latin American e-tailer MercadoLibre Inc (NASDAQ:MELI) off a cliff. MELI stock plunged more than 10% the day the news came out. It shows the power that Alibaba is developing outside of its home market. China already was big enough to make Alibaba the biggest retailer in the world; its potential if it succeeds internationally would be almost unfathomable.
Alibaba is a classic story stock. It is growing incredibly quickly and appears poised to take over the whole world in the wake of its Chinese success. Looking at the bull case alone, BABA stock seems like a must-own.
However, BABA stock bears have some strong arguments of their own. The company’s accounting system is complex, to say the least. And it seems that JD is catching up to them on their home turf, particularly in terms of delivery technology. Alibaba’s frenetic rush for growth may leave them exposed on their home turf. In any case, with the stock up more than 100% year-to-date, this probably isn’t the best time to be buying shares.
At the time of this writing, the author owned JD stock. He had no position in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.