Since coming public in late 2014, Alibaba (NYSE:BABA) has certainly not disappointed investors. The shares have gone from $68 to $198, with the market cap reaching about $519 billion. BABA stock is only about 7% or so from its all-time high.
But I think there is more room on the upside, primarily because of the long-term prospects. BABA is well positioned in strategic markets — like ecommerce and cloud computing — that are benefiting from secular trends in China.
Now this is not to imply that somehow BABA stock will be a smooth ride, either. BABA still has its challenges. First of all, the competitive environment in China is intense. Note that BABA must fight against tough rivals like JD.com (NASDAQ:JD) and even Amazon (NASDAQ:AMZN).
The Chinese market can also be dicey. From time to time, the ruling government can make unexpected regulatory decisions that could make things tough for BABA.
And finally, President Trump’s trade moves could also be a wildcard. Consider that BABA relies heavily on cross-border transactions. So a deceleration in international trade could put pressure on the company.
While such factors are serious, I still think BABA has the scale, resources and technologies to deal with these headwinds. After all, the company continues to run on all cylinders, as seen with the latest standout earnings report.
Revenues spiked by 61% to 61.93 billion yuan, with earnings increasing 37%. Keep in mind that the profits were adversely impacted from last year’s gain of the unloading of the Momo (NASDAQ:MOMO) holding.
Going forward, the momentum is likely to continue. BABA believes that revenues will grow 60% during the next year. Given the company’s size, this kind of growth is astonishing.
Of course, the main driver is the ecommerce business. During the most recent quarter, revenues in this segment jumped by 62% to 51.29 billion yuan. To put this in perspective, the growth rate was 47% a year ago.
But the ecommerce opportunity is not just about China. BABA has been investing heavily in other countries, such as in Southeast Asia. According to InvestorPlace contributor Luke Lango: “[these markets] present a huge opportunity for Alibaba to super-charge revenue growth over the next five to 10 years.”
Next, there is the cloud business. It’s actually holds the No. 3 position in the world, behind AMZN and Microsoft (NASDAQ:MSFT). BABA has an inherent advantage since it has a large number of merchants, which are potential customers. In fact, for the latest quarter, the cloud business saw revenues more than double to 4.39 billion yuan!
But BABA has also continued to focus on innovation. In the quarter, the company launched 316 new products for its cloud platform. More than 60 use artificial intelligence, data management and security. BABA is also looking at emerging categories like IoT (Internet-of-Things).
And BABA has been building a thriving online entertainment business. At the heart of this is the video platform, Youku, which is growing the subscriber base at well over 100% a year.
Bottom Line on BABA Stock
Even with the strong gains in BABA stock, the valuation is still reasonable, especially in light of the growth rate. The forward price-to-earnings ratio is 22X. By comparison, AMZN is at 83X.
Again, there are still risks. But they should be well worth it, as the company is likely to remain a leader in core areas of the digital world for many years to come.
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.
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