Alibaba (NYSE:BABA), like many Chinese stocks, has been volatile in 2019, mostly due to trade war concerns. Still, BABA stock has added more than 30% so far this year.
Yuan, the Chinese currency has also depreciated considerably versus the U.S. dollar, and reports of a potential cooling of the Chinese economy well into 2020 have added to the recent uncertainty surrounding Alibaba shares.
Alibaba stock and other Chinese names may undergo further volatility and profit-taking in the coming weeks. However, investors with a two- to three-year horizon may consider investing in Alibaba shares, especially as the company gets closer to report earnings on Nov. 1. Here is a deeper look at the longer-term prospects of BABA stock.
BABA Stock and eCommerce Leadership
Alibaba’s current share of the Chinese eCommerce space is almost 60%, and about 87% of its total revenue comes from eCommerce.
The group operates through three main eCommerce sites — Taobao, a Chinese online shopping website, Tmall, a Chinese-language website for business-to-consumer online retail, and Alibaba.com, the group’s international trade site.
The three sites have hundreds of millions of users globally and host millions of businesses. BABA’s mobile monthly active users (MAUs) on its eCommerce platforms now tops 755 million.
Alibaba has recently announced the acquisition of Kaloa, the eCommerce platform of China-based NetEase (NASDAQ:NTES) for $2 billion. Kaloa currently provides Chinese consumers with imported merchandise, ‘western’ brands, as well as personal and household items, such as skin care, cosmetics and baby products.
Tmall Global and Kaola are China’s largest and second-largest cross-border eCommerce platforms, respectively. Therefore two combined platforms are likely to surpass rivals in China.
Many analysts believe that Alibaba’s bottom line is not going to be too adversely affected by current trade wars as its business model is tied to China directly, decreasing the long-term risks of bi-party trade wars.
In fact, on Aug. 15, when Alibaba released quarterly earnings, the results exceeded analyst estimates in both revenue and earnings. BABA stock’s revenue increased 42% annually to 114.9 billion RMB ($16.7 billion). It topped estimates by about $880 million.
Strength in numbers was in part due to Alibaba’s core commerce business where revenue rose 44% year-on-year in the June quarter.
According to the quarterly report, annual active consumers on retail marketplaces reached 674 million, an increase of 20 million from the 12-month period ended March 31, 2019. Over 70% of those new consumers were from less-developed cities in China, a fact that was regarded as Alibaba’s successful push into lower-tier Chinese cities.
BABA Stock and the Cloud
Alibaba is rapidly expanding into many other lucrative industries, including cloud computing infrastructure, digital payments, online entertainment, and food delivery.
With a population of 1.4 billion people, China is the largest country in the world. A rising middle class leads to higher consumerism, and that bodes well for many industries in China. One of those industries set to benefit is cloud computing.
Alibaba’s concentrated push deeper into cloud computing is increasingly being compared to the success of Amazon’s (NASDAQ:AMZN) cloud business. In cloud computing, BABA is now the market leader in Asia.
In the most recent earnings result, investors cheered that BABA’s cloud computing revenue soared 66% YoY. It now brings in about 7% of total revenue.
As a result of increased diversification as well as the growth in the cloud space, Alibaba’s total revenue is expected to grow by double-digit percentage rates. Such a growth rate would indeed be impressive for a company with a market cap of about $461 billion.
BABA Stock and International Expansion
Finally, forward-looking investors may want to pay attention to BABA’s international growth numbers too. Currently, more than 90% of the ecommerce giant sales are made in China.
But BABA also has investments in start-ups in South Asia and Southeast Asia. Higher incomes and rising internet penetration rates are likely to strengthen both regions’ eCommerce markets and contribute to sustainable growth for BABA stock.
Among the start-ups in those regions in which BABA has stakes are Paytm, an Indian digital payments provider, and Lazada, a Singapore-based eCommerce company that is growing in overseas markets. For example, according to the most recent results, Lazada achieved over 100% YoY order growth.
The group’s international businesses is led by its overseas marketplace AliExpress which also expanded with 29% YoY sales growth.
BABA is also looking to partner with European companies. Many European companies are still discovering new ways to enter the Chinese market, and BABA may enable them to connect with Chinese customers faster.
BABA’s mobile payment network, Alipay, is also seeking to expand in Europe. International growth will not only help increase the company’s bottom line, but it will also enable BABA to diversify away from China, lowering the macro risk of BABA stock.
The Bottom Line on BABA Stock
Alibaba stock has multiple catalysts to drive growth in the coming years. Its core marketplace operations provides the group with strong cash flow. In other words, eCommerce, cloud computing, and other investments throughout China and globally make it a disruptor and a sound long-term investment.
In China consumer disposable incomes are going up, fueling growth in many sectors, including eCommerce. In fact, the e-commerce market in China is forecast to almost double within the next four years to reach $1.8 trillion. Therefore, even if the Chinese economic growth pauses for a few quarters to come, the country’s growth potential is intact.
Therefore long-term investors should view any decline in Alibaba stock as a good opportunity to buy into the shares.
However, traders with a short-term horizon should remember that there might be further choppiness and even profit-taking in Alibaba stock. The daily volatility of Alibaba stock is high, giving it a wide trading range, so short-term traders should proceed with caution.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.