Since reaching nearly $200 in early May, Alibaba (NYSE:BABA) stock has come under pressure. But over the past few weeks, Alibaba stock has seen notable improvement.
The reason: There was a relaxation of tensions in the trade war between the U.S. and China. President Trump agreed to hold off on any new tariffs and he loosened restrictions on selling technology to Chinese powerhouse, Huawei.
So there was good reason for a rally. In fact, for the year so far, the BABA stock price has risen about 24%. This is actually in-line with the kinds of returns for the past few years.
But of course, the main question now is: What’s in store for Alibaba stock going forward? Well, besides the improvement with the trade situation, there are other major catalysts that should help with BABA stock. So let’s take a look at three:
China Ecommerce Powerhouse
As seen with Amazon (NASDAQ:AMZN) in the U.S., the dominance of the ecommerce market is a mega advantage. It allows for the collection of massive amounts of data and provides a platform for launching new services.
And yes, when it comes to BABA, the company is essentially the Amazon of China … but with a much more profitable model. The company operates a high-margin digital marketplace that connects buyers and sellers.
Keep in mind that the scale is enormous, dwarfing the U.S. market. BABA has 721 million mobile monthly active users (MAUs), up 104 million on a year-over-year basis.
To get a sense of how large the opportunity, here’s what BABA Executive Vice Chairman, Joseph Tsai, said during the fourth-quarter earnings call: “The middle class in China has reached critical mass of over 300 million, almost as large as the entire U.S. population. The middle class will double in the next 10 years, especially from the lesser developed Chinese cities. While total Chinese domestic consumption is $5.5 trillion today, consumption from these third-, fourth-, and fifth-tier cities, with a combined population of 500 million people, will triple from $2.3 trillion to nearly $7 trillion in the next 10 years.”
The company has also been aggressive in building on-demand services, such as for food delivery. Part of the strategy has been to partner with companies like Starbucks (NASDAQ:SBUX). Such efforts will certainly be a big help in providing more convenience and stronger connections with customers.
Cloud And AI
Again, BABA has borrowed from the Amazon playbook by making an aggressive move into the cloud industry. This may actually turn out to be the biggest growth driver. In fact, BABA’s cloud business is already the largest not only in China, but the whole Asia Pacific region.
During the latest quarter, revenues in the segment spiked by 76% to $1.15 billion. To keep up the growth, BABA has been rapidly innovating the cloud platform by adding new services for blockchain, cybersecurity, database systems and AI.
Note that BABA has also been leveraging these technologies across its own properties. For example, Tmall Genie is an AI-powered smart speaker. Then there is the Amap app, which is China’s largest mobile provider of mapping, navigation and traffic information.
Financials And Valuation
The valuation on BABA stock is fairly reasonable. Consider that the forward price-to-earnings multiple is 19X. By comparison, JD.com (NASDAQ:JD) trades at 29X – and is growing at a much slower pace. For example, BABA reported revenues that jumped a sizzling 51% to $13.9 billion during the latest quarter.
And with the resources, BABA has been making smart investments. Perhaps the most significant is Alipay, which has become one of the largest payment networks in China along with Tencent’s (OTCMKTS:TCEHY) WeChat.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
