Many people in the U.S. are unfamiliar with the e-commerce giant Alibaba (NYSE:BABA). However, Alibaba is one of the most important Chinese companies on the U.S. stock exchange. Alibaba shares have been on a rollercoaster over the past couple months due to increased trade tensions between the U.S. and China.
These tensions won’t be resolved anytime soon, though they have temporarily cooled off. And since Alibaba’s business model is tied directly to China, ongoing trade war concerns are largely overblown.
BABA stock does have a number of headwinds working against it. But in my opinion, the potential rewards definitely outweigh the risks.
Here are three reasons you should consider investing in Alibaba stock.
3 Reasons Why You Should Buy Alibaba Stock
The company’s fundamentals are strong: Alibaba has repeatedly downplayed the impact of the trade war, instead choosing to focus on the company’s strong revenue results. Alibaba released its quarterly earnings report in May and both its sales and revenue exceeded investor expectations.
Alibaba is similar to Amazon (NASDAQ:AMZN) in the way it continues to expand into new industries. The company is most successful in its e-commerce ventures but continues to expand into other markets. For instance, its cloud computing revenue rose 76% over the past year to reach $1.12 billion.
Alibaba is also moving into the digital advertising and food delivery industries. The company also invested in the Sina Weibo, a Chinese microblogging company that’s often compared to Twitter.
The company is free cash flow generative: Unlike Amazon, Alibaba acts as a middleman in the e-commerce industry. This means the company doesn’t house any inventory and doesn’t have to navigate the logistics of shipping products to consumers.
Since Alibaba’s expenses are much lower, the company generates higher free cash flow than Amazon. This allows the company more discretionary spending so it can invest in additional growth opportunities and business ventures.
Increased consumer spending in China: Many people are concerned that the Chinese economy will slow down in the coming years. However, its GDP continues to expand at an average rate of 6% per year. And it’s likely that the Chinese middle class will continue to expand for a long time.
In 2018, China’s online retail sales hit $1.3 billion, which is an increase of nearly 24% year over year. And most impressive of all is that Alibaba accounted for 58% of these sales. The company currently has 576 million active users, which is bigger than the entire U.S. population.
Not to mention, Alibaba has a long way to go before it reaches full penetration in China. Consumer spending in China will only continue to increase and there’s little doubt that Alibaba stands to reap many of the rewards.
Bottom Line on Alibaba Stock
Alibaba’s shares have taken a hit in recent months, largely due to investors overreacting to trade war concerns. But considering the company’s positive growth potential and the economic opportunities available in China, Alibaba stock is a strong investment going forward.
As of this writing, Jamie Johnson did not hold a position in any of the aforementioned securities.
