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.