There is no stock InvestorPlace writers pound the table for more often, and with more vehemence, than Alibaba Group Holding Ltd. (NASDAQ:BABA).
The headlines read like blurbs for a great movie.
Still early in the growth story, says Luke Lango. Buy immediately, says Will Ashworth. Buy the dip, says Joseph Hargett. It will reach $200 per share, says Richard Saintvilus.
I remain concerned that top Alibaba holders may cash out but I have also called it “better than Amazon.Com Inc. (NASDAQ:AMZN)” and I have put my money where my mouth is. I bought shares in December, bought more in March, and my investment is up over 70%, with more gains expected as trading opened October 2.
Why, you may ask? Why is Alibaba the best stock in today’s market?
A Unique Business Model
Amazon and other e-tailers buy and warehouse merchandise. They buy bulk and make deliveries, living on retail margins.
Alibaba, by contrast, is mostly the glue that holds buyers and makers of things together. It’s nearly all electronic infrastructure. Instead of Amazon-like profit margins, it has Facebook Inc. (NASDAQ:FB) like profit margins. In the most recent quarter, over $1 of every $4 in revenue hit the net income line.
Second, this is China. Alibaba does business in Yuan, not dollars. During the June quarter the Yuan was trading at roughly 6.8 to the dollar. During the quarter just ended the average price was below 6.7, and at one point was below 6.5. This means you’re getting more dollar profits back. The next quarter should look even better than June.
Third, Asia. Yes, Alibaba dominates in bringing China to the full benefits of Internet marketing. But it also does this throughout Southeast Asia. All its main markets are composed of people who are, on average, younger than those in the United States. Young countries that are at peace are dynamic markets.
The result is a unique growth story, sales growing at close to 60% per year, and profits at 25% of sales. Alibaba had enough cash on its books in June to pay its debts twice over. Operating cash flow looks like an airplane taking off, and came to over $11 billion last year.
Wash, Rinse Repeat
All this is highly replicable, because Alibaba continues to break new ground, expanding into the most profitable niches.
Its Ant Financial is the most valuable fintech company in the world. It dominates the cloud in China and is expanding rapidly in Europe, becoming a real challenger to Amazon. It is growing its logistics system with cash, with partners, so the $3 billion per year investment won’t dent its profitability.
Alibaba isn’t just backing movies. It’s backing video games, using its cloud infrastructure in ways other game companies can only dream of. Gaming was already twice as big as Hollywood in 2013 and that lead is only accelerating.
The Bottom Line
In short, Alibaba is where the growth is.
While American policy is stupid, China’s policy is steady. Alibaba has a solid base in what will soon be the largest market in the world, an easy way to attack all the fastest-growing markets, and a stable of hungry, young executives – executive chairman Jack Ma is younger than Jeff Bezos and his top men are even younger.
You can complain about “Red China” all you like, but China today is demanding green, and if you want to be rolling in the long green Alibaba is the best play on the board.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA, FB and AMZN.
