An epic battle is brewing for the Alibaba Group Holding Ltd (NYSE:BABA) dominance of the Chinese e-commerce market.
We got more evidence of this with a deal from Tencent Holdings Ltd (OTCMKTS:TCEHY) and JD.Com Inc (ADR) (NASDAQ:JD), which have agreed to invest $863 million in Vipshop Holdings Ltd – ADR (NYSE:VIPS). Although on the news, BABA stock did hold up fairly well.
Yet the Tencent-JD.com deal is certainly important. VIPS is a top e-commerce platform for discount retailer brands in China, with a focus on women.
And yes, the investment involves key strategic arrangements. Tencent will leverage VIPS on its hugely popular wallet app, which is a part of its 1-billion-plus social media platform. As for JD.com, it will provide entries on the main page of its mobile app.
OK then, so what does this mean for BABA stock? Should investors get cautious?
Well, it is not time to panic. But I think it is reasonable to assume that — over the next few years — it will get tougher for BABA to crank out growth. JD.com and Tencent have tremendous resources and assets to put up a big fight.
But in the meantime, I still think BABA stock has room on the upside. After all, the e-commerce opportunity is massive in China, and there is enough room for a variety of large players. According to InvestorPlace contributor Laura Hoy:
“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.”
The key is the burgeoning ranks of the middle class, which is expected to reach 600 million by 2020. By comparison, the entire U.S. population is roughly 320 million.
Now, when it comes to BABA stock, it is encouraging that the company has powerful network effects, which will make it tough for rivals to get an edge. The retail marketplaces have about 488 million active consumers, up about 22 million on a year-over-year basis.
Oh, and BABA has shown creativity and boldness in its efforts, which have helped propel the growth.
Just look at a recent deal with Ford Motor Company (NYSE:F). The two companies have agreed to sell cars online, including using the BABA payments system. As our own James Brumley has stated: “Such a process would indeed meet Alibaba’s goal of making purchasing a car as easy as buying a can of Coke.”
BABA Stock and Other Businesses
BABA stock is not just about e-commerce. Over the years, the company has expanded into other growth segments. It has essentially used the Amazon.com, Inc. (NASDAQ:AMZN) playbook!
Here are two examples:
- Cloud: During the latest quarter, revenues spiked by 99% to $447 million. BABA has continued to offer plenty of new features and products for the platform. As a result, the company has been able to snag more and more enterprise customers, like Philips and the Bank of Nanjing.
- Entertainment: At the heart of this business is the highly popular Youku video platform. During the quarter, subscription revenues shot up over 180%. A key part of the growth strategy has been to license and develop original content.
In the meantime, BABA has remained aggressive with its equity investments. Some of its winners include Weibo Corp (ADR) (NASDAQ:WB) and Momo Inc (ADR) (NASDAQ:MOMO).
Bottom Line on BABA Stock
The moves from Tencent and JD.com are to be expected. The e-commerce market is too big to ignore. But then again, BABA should continue to generate substantial growth from this opportunity for the long haul. During the most recent quarter, the company increased its fiscal-year revenue ramp from 45%-49% to 49%-53%.
And even with the run-up in BABA stock, the valuation is still reasonable. Note that the forward price-to-earnings ratio is at 26X. By comparison, Facebook, Inc. (NASDAQ:FB) is at 27X and Alphabet Inc (NASDAQ:GOOGL) trades at 26X.
So all in all, for investors looking for a play on China, BABA stock still looks like a good option.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
