It’s safe to say that China tech stocks are back, and that e-commerce and cloud giant Alibaba (NYSE:BABA) is leading the charge. Alibaba just reported really strong first quarter numbers that beat top and bottom line expectations, and comprised a stunning 60%-plus revenue growth rate. Alibaba stock is struggling for gains after that report, but the stock is up 4% over the past several days.
Alibaba’s failure to rally big on strong quarterly numbers isn’t that worrisome. Alibaba stock was already in rally mode before the report because, over the past several days, other China tech stocks like Momo (NASDAQ:MOMO) and 58.com (NASDAQ:WUBA) have also reported strong quarterly numbers.
In other words, there is a new trend in town. China tech stocks have been among the market’s biggest losers for several weeks thanks to a strong dollar and trade war tensions. That’s changing now. China tech stocks are bouncing back from depressed levels thanks to really strong earnings which underscore still healthy underlying fundamentals.
This rebound will continue. At the front of the charge will be BABA stock, which is one of the most attractive equities in the market based on composite risk-reward profile. A lot of other China tech stocks also have attractive risk-reward profiles. Thus, over the next several quarters and years, BABA stock will lead the whole China tech sector to big gains.
Here’s a deeper look.
Alibaba’s Quarter Was Great
Alibaba’s first quarter report made one thing very obvious: growth isn’t slowing, at all.
Alibaba reported 61% revenue growth in the quarter, led by 61% core commerce growth and 93% cloud growth. Over the preceding four quarters, the average revenue growth rate at Alibaba has been just under 60%, led by 60% core commerce growth and triple-digit cloud growth.
While cloud revenue growth is naturally slowing from a triple-digit rate, that slowdown is immaterial and revenue growth everywhere else is accelerating higher.
That is impressive. Especially considering growth rates are in the 60% range. Big picture, this sustained huge revenue growth is a testament to Alibaba’s massive market potential (the China consumer market is huge and rapidly growing), and the company’s ability to execute against that potential.
Meanwhile, margins are getting sliced. But, all of the margin compression is due to long-term investments into new-format retail operations and geographic expansion. Excluding those investments, margins were stable on a year-over-year basis.
Thus, Alibaba’s first quarter numbers affirmed that this is a huge revenue growth company with a ton of momentum. Margins are down today, but that is a near-term phenomena that is driving big growth.
Once business expansion moderates, investments will phase out, and margins will ramp on a huge revenue base. That will lead to explosive earnings growth.
China Tech Is Back
China tech stocks were among the biggest losers in the market over the past several weeks as trade tensions escalated and the dollar rose to multi-year highs.
But, China tech stocks have been on a big rebound ever since the dollar topped off in mid-August after testing 2015 highs against the Chinese yuan. Since then, Alibaba stock is up 4%; same with shares of Baidu (NASDAQ:BIDU). Weibo (NASDAQ:WB) is up 8%. Baozun (NASDAQ:BZUN) is up 14%. Both MOMO and WUBA are up more than 20%.
Broadly speaking, the dollar topping off has shifted investor focus back to the fundamentals supporting these China tech stocks. Those fundamentals are quite strong, as many of these stocks are big growth companies trading at mild growth valuations.
Consequently, if the dollar continues to weaken going forward, these China tech stocks have a lot of fundamentally supported firepower to shoot higher.
Alibaba Stock Has Tons of Upside
Alibaba should be among the biggest winners in this China tech rebound.
This is a company which has been growing revenues at a consistent 50%-plus pace. By comparison, the company’s U.S. counterpart, Amazon (NASDAQ:AMZN), grows revenues at a consistent 30%-plus pace.
AMZN stock trades at more than 100X forward earnings. Alibaba stock trades at less than 30X forward earnings. Something doesn’t add up here.
Granted, one can reasonably argue that Amazon is ramping margins from a much smaller base, and thus earnings growth potential over the long run at Amazon is much more robust than it is at Alibaba. That is true. But not that much more robust to warrant a 70-plus point divergence in forward earnings multiples.
Long story short, BABA’s sub-30X forward earnings multiple hardly captures this company’s long-term growth potential. Thus, over the next several years, BABA stock should be a big winner thanks both to strong profit growth and healthy multiple expansion.
Bottom Line on Alibaba Stock
Alibaba stock is a long-term winner. First quarter numbers affirm that. Regardless of what happens on the trade front in the near-term, Alibaba should head significantly higher in a five year-plus window.
As of this writing, Luke Lango was long BABA, MOMO, BIDU, WB, and AMZN.