Alibaba Group Holding Limited (NYSE:BABA) is on a tear. The stock is flirting with 52-week highs and shows no signs of falling anytime soon. At a forward P/E of 27x, compared to over 120x with Amazon.com, Inc. (NASDAQ:AMZN), Alibaba looks like a bargain. Yet, Alibaba is growing its business not just in the cloud computing space. Whereas Amazon’s AWS keeps growing at enormous rates, Alibaba’s cloud services are one of its many sub-businesses.
Robust Growth of BABA Stock
The core commerce business is the reason for Alibaba’s robust revenue growth. The company continues to innovate its business by investing in and developing data technology, along with applying big data analyses. In its fiscal first-quarter, Alibaba’s MAU on mobile totaled 529 million. In China, Mobile Taobao is a leading shopping destination for consumers. The app owes its stickiness with customers to the community driving content, which in turn keeps visitors engaged.
Mobile Taobao is so successful because it is a community-driven platform. The site does not have just buyers and sellers, which is the basic part of the revenue generation. It has influential users and opinion leaders who create engaging content. The customer consumes that information, which in turn drives sales sold on the site.
The net result is click growth from both new and existing users. The good CPC numbers demonstrate that the site is becoming increasingly engaging for the visiting consumer. Looking ahead, investors should expect customers will spend more time on the platform in the quarters ahead. This will show up on the bottom line as higher sales through increasing orders per user.
Strong Growth From BABA Cloud
Alibaba’s Cloud computing business grew at a solid pace in Q3. Revenue (annualized) exceeded $1 billion, and grew 96% year-over-year, thanks to the customer count surpassing one million. Growing the business through market expansion is Alibaba’s primary strategy. By being the first mover in this space, the e-commerce giant will face little competition. Still, Alibaba is still investing heavily in the business to support the customer growth.
To avoid offering only one service, like storage or basic app services, Alibaba’s Cloud unit is working closely with a variety of SaaS service providers. This not only broadens the types of solutions available but ensures the unit is compatible other application suppliers. CRM, ERP, and data analytics are only a few of the tailor-made applications customers may want.
The company’s 67 percent year-over-year non-GAAP net income growth is nothing short of impressive. Its $3.3 billion in free cash flow generation is an even brighter bottom-line number. The strong FCF resulted in the company ending the quarter with nearly $22 billion in cash. Should Alibaba decide to make any more investments or raise R&D activities, it will have no problem paying for it without issuing shares.
Alibaba Makes Strategic Investment
Late last month, Alibaba raised its stake in Cainiao, a logistics firm. The $801 million investment lifts Alibaba’s stake to 51%, up from 47%. Cainiao will help Alibaba meet the goal of speeding up the time it takes to fulfill orders. Not only will this strengthen the company’s moat in China, but it will also fulfill international orders faster than any of its competitors.
Fair Value
According to seven models built on Finbox.io, a site that calculates the fair value of companies, Alibaba stock is trading above its fair value. The Revenue Multiples model suggests Alibaba is relatively expensive compared to Tencent Holdings and 58.com Inc (NYSE:WUBA). The 5-year DCF revenue exit model paints a more optimistic value for Alibaba. Assuming revenue growth of at least 25% – 50% in the next five years, which is achievable based on historical patterns, BABA stock is worth over $200 a share.
Takeaway
Alibaba is clearly a dominant force in e-commerce in China. Its gross margin of over 60% will likely get better as the company invests in ways to keep its customers coming back. Small, strategic investments that are low-risk will help Alibaba stay ahead of its competitors.
Disclosure: As of this writing Chris Lau had no position on any of the above mentioned stocks.
