Alibaba Group Holding Ltd (NYSE:BABA) continued to deliver significant growth in 2017, so it’s not surprising investors are thinking ahead to the next big price target for BABA stock.
That said, $400 is a tall mountain to climb at this point in its corporate history. And I’m doubtful it can do it in 2018. But even though I’ve learned never to say never, 2019 is much more realistic.
BABA stock first hit $100 in October 2014, before losing half its value over the next nine months. Alibaba stock didn’t get back to $100 until September 2016. Set to hit $200, BABA’s snagged a two-bagger for shareholders in just 17 months. Assuming it repeats the feat in the same amount of time, BABA stock would hit $400 in June 2019.
If successful, we’re talking about a four-bagger in less than three years. The S&P 500, by comparison, would take around 10 years based on a 16% annualized total return over the past five years.
Alibaba’s ability to do it again depends on a lot of good fortune combined with these three factors.
In the second quarter, Alibaba’s core commerce business saw revenues increase by 63% year-over-year to $7 billion or approximately 83% of its overall revenue.
The company is still very much a Chinese e-commerce company, something InvestorPlace contributor Vince Martin sees as a real problem given competitors like JD.Com Inc (ADR) (NASDAQ:JD) are taking market share in BABA’s home market.
But I’d gladly give up 10% market share in China to gain 10% market share everywhere else.
In Q2 2018, Alibaba generated $433 million in international commerce retail revenue, a 115% increase from the same quarter a year earlier. By comparison, Amazon.com, Inc. (NASDAQ:AMZN) generated $13.7 billion of international retail revenue in Q3 2017, a 29% increase over a year earlier.
If Alibaba can generate $10 billion in annual international commerce retail revenue by the end of 2019, that would go a long way to delivering a $400 share price.
Into the Cloud
Investors are acutely aware that Amazon’s profits are driven in large part by AWS, its cloud computing business. That’s the profit center that allows Amazon to venture into areas such as advertising without breaking the bank.
Alibaba would do itself a big favor if it could get to the same point in its development.
Consider that Amazon’s AWS segment generated 10 times the operating profit as its North American retail business in the third quarter, while its international unit lost slightly less than $1 billion.
Meanwhile, Alibaba had $447 million in cloud computing revenue in Q2 2018 with a small operating loss. Amazon’s cloud business is generating eight times as much quarterly revenue.
If Alibaba could narrow that deficit to about four times the revenue while turning a profit, that too would make a big difference to Alibaba’s stock price.
Digital Media a Drain
Alibaba’s various internet properties lost $509 million in its second quarter on $721 million in revenue. If BABA can continue to chip away at its margins — an adjusted EBITDA margin of negative 36% in the quarter, 300 basis points lower than a year earlier — it won’t be nearly as significant a drag on BABA stock.
I’m not suggesting the company’s online video streaming service needs to make money — just look at the Netflix, Inc. (NASDAQ:NFLX) valuation — but it would be nice if it could reduce its losses.
Bottom Line on BABA Stock
The concerns of investors regarding its corporate governance aside, I’m on the Alibaba bandwagon until it gives me a reason to step off.
$400 by June 2019 at this point seems possible, if not probable. I wouldn’t be afraid to buy it, but I would save some cash just in case the markets decide to correct.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.