It’s been a bumper year for Chinese e-commerce firm Alibaba Group Holdings Inc. (NASDAQ:BABA). Sentiment regarding Alibaba stock has been overwhelmingly bullish and the firm’s massive growth in up-and-coming sectors like cloud computing and digital media has been praised by the wide majority of analysts.
I myself have sung the praises of BABA stock because the firm really does have a lot of growth potential that simply can’t be ignored. However, as my colleague Josh Enomoto pointed out, BABA isn’t a sure thing and even compared the blind optimism surrounding the stock to that of the 90’s dot-com bubble.
Here’s a look at the good, bad and the ugly of Alibaba stock.
Pro: Growth Galore
The big reason to love Alibaba stock is its growth potential. Right now, e-commerce is the firm’s bread and butter and although that might seem like a relatively mature market to you and I, it’s actually only getting started in China. At the moment, e-commerce only makes up about 15% of China’s retail market. As that percentage grows, BABA is likely to grow right alongside it because the firm has already engaged around 70% of China’s internet users. That means the marketplace is impossible for retailers to ignore if they want to increase their online presence.
Add to that China’s growing middle class and you have the perfect growth recipe for a developing e-commerce firm.
Pro: Cloud Computing
Alibaba’s cloud computing arm is another big reason investors are flocking to the stock. Much like Amazon.com Inc. (NASDAQ:AMZN) in the early days, BABA’s cloud computing business wasn’t profitable. However the firm has been able to grow its cloud segment into a profitable business by expanding throughout China and the rest of Europe, making it a formidable challenger to Amazon’s AWS.
Last year, Alibaba opened data centers in Europe, Australia, the Middle East and Japan- marking its first steps into international markets. Not only is Alibaba growing its piece of the cloud pie, but Gartner researchers found that the cloud services market is growing faster than almost every other IT market, so the pie itself is growing as well.
Pro: New Technology
Growth investors are also smitten with BABA’s commitment to being more than just an e-commerce firm. In addition to cloud computing, Alibaba stock also offers investors a way to bet on up-and-coming technology because the firm invests aggressively into what it deems to be “breakthrough technology.” Alibaba Chief Technology Officer Jeff Zhang announced this week that the firm would be investing $15 billion on R&D over the next three years.
That investment will go toward what Zhang calls “disruptive technology” like machine learning, language processing, security and visual computing.
Con: Bubble Status
Whenever you see a triple digit gains like what we’ve seen with Alibaba stock over the past 10 months, you have to consider that swings like that rarely happen in just one direction. BABA CEO Jack Ma is predicting revenue growth of nearly 50% in the coming year and that’s part of the reason for the stock’s meteoric rise. However, Alibaba’s market cap is already approaching 470 billion, so that kind of growth is a tall order.
With so much hype, investors have to be cautious because any bump in the road- large or small- could cause a significant pullback.
Con: Heavy Reliance On China
Another big reason to proceed with caution is the fact that BABA’s growth is heavily reliant on China. Macroeconomic events that devalue the yuan could wreak havoc on Alibaba stock. Not only that, but consumer spending in China is already erratic, so any geopolitical disruptions could hurt the firm’s bottom line.
There’s also the fact that a lot of the hype around Alibaba stock is based on the potential for increase online shopping among the nation’s massive population. However, there are some factors that bulls aren’t accounting for when they look at the surface figures. Yes, China has a massive population and yes e-commerce is only just getting started- but we might see things develop quite differently in China than they have in the US.
For one, theres’ the fact that China’s urban population is around 58% compared to 82% in the US. Then there’s also the fact that the median age in China is 37– roughly the same as that of the US but considerably older than you’d hope for if you’re looking to see the population increase spending.
Perhaps the most troubling reason to be cautious of Alibaba stock and what’s kept me from buying it myself despite the tremendous growth potential is a lack of trust. The Securities and Exchange Commission has been reviewing BABA’s accounting practices for the past year because of questions about how the company calculates its growth.
It’s possible that the SEC may find nothing, but then again it’s also possible that an accounting error will turn up and the firm will have to revise its reported financials. Not only would that be disastrous for BABA stock, but it would add fuel to skeptics who worry that the firm doesn’t paint a complete picture of its financial situation.
The Bottom Line on BABA Stock
Alibaba stock has been a top performer so far this year, and it’s very possible that the triple-digit gains we saw this year is the start of a larger upward trend. However, you should take a moment to survey the risks before jumping in with both feet. BABA stock has its fair share of baggage, but if you’re willing to deal with some potential turbulence it could be a great long-term play.
As of this writing, Laura Hoy was long AMZN.