Here’s one big reason to buy Alibaba Group Holding Ltd (NYSE:BABA) shares: Amazon.com, Inc. (NASDAQ:AMZN) is throwing in the towel on trying to compete in China. The move comes as BABA stock has nearly doubled in price in the first nine months of 2017.
Amazon doesn’t give up all that easily. After all, this is the same company that completely shook the retail world by pioneering a new era of digital commerce. It’s also the same company that runs the market’s biggest cloud computing business as a side gig. And this is the same Amazon that is attempting to uproot the entire U.S. logistics market, bringing dramatic changes to the grocery world, and making forays into food delivery, streaming video, and smart home.
Amazon is basically a company that has its sights set on world domination.
Well, world domination outside of China. Amazon ran a giant Kindle promotion across Alibaba’s shopping sites recently, a sign that Amazon is giving up on trying to compete in the China e-commerce market. All signs point to Amazon turning its attention to India.
The takeaway? Buy BABA stock. Amazon doesn’t give up easily. The fact that they are giving up on China is a testament to just how strong the Alibaba growth story really is.
Alibaba Dominates China
I’ve claimed before that the Alibaba growth story runs parallel to the China internet growth story. In fact, they are one and the same. As the country’s middle class grows and urbanizes, it will start to look a lot like America’s middle class. That means more technology, more phones, more online shopping, and more internet gaming, among other things.
Alibaba exists to serve the growing demands of this burgeoning Chinese middle class. Because the urbanization story is just getting started there, BABA stock is still in its early innings of super-charged growth.
For example, consider the internet gaming world in China. The country’s online gaming industry was worth about $11.8 billion last year. That’s pretty big, but it really doesn’t even scratch the surface as to how big this market could be. It’s expected to grow near 90% next year.
Alibaba is starting to get serious about this business. They recently acquired online gaming company Ejoy and is establishing a business unit dedicated specifically to online gaming. The market is currently dominated by Tencent Holdings Ltd (OTCMKTS:TCEHY) and NetEase Inc (ADR) (NASDAQ:NTES), but you can be sure that BABA, with its vast resources and huge reach, will make some serious market share gains in online gaming over the next several years.
Also consider other geographies in Asia that are just starting to urbanize, such as Southeast Asia. That region has some 600 million people, the majority of whom don’t use online shopping yet. BABA is starting to sink its fingers into this huge, largely untapped growth market.
Now consider the logistics markets. China’s logistics market is the largest in the world, and it’s growing quickly. Much like Amazon is doing in the United States, Alibaba is starting to take more control of this logistics market. BABA recently invested an additional $807 million to increase its stake in warehouse and express delivery station operator Cainiao Smart Logistics from 47% to 51%.
Then there is the whole brick-and-mortar roll out. BABA recently opened an IKEA-like store in China.
All in all, Alibaba is so deeply embedded into Asia’s B2C marketplace that the company will naturally grow in-step with Asia’s middle class.
Bottom Line on BABA Stock
The Alibaba growth story is the China internet growth story.
Both are just getting started.
BABA stock continues to trade at a discount to its growth potential, at only 26-times next year’s consensus earnings on projected earnings growth of over 30%.
That makes no sense for this hyper-growth stock supported by a secular growth narrative.
Along with Facebook Inc (NASDAQ:FB), BABA stock is one of the best growth stocks to own in today’s market. But that’s just my opinion.
As of this writing, Luke Lango was long BABA, FB, and AMZN.
