Let’s be fair to Alibaba (NYSE:BABA). Shares of the Chinese eCommerce giant giant are up about 26.20% year-to-date and that’s nothing to scoff at. That puts Alibaba stock ahead of U.S.-based rival Amazon (NASDAQ:AMZN) by nearly 1,100 basis points.
Add to that, based on traditional earnings metrics, Alibaba is the less expensive of the two stocks.
Though Alibaba’s current U.S. footprint can best be described as small but growing, the shares have been hamstrung by the ongoing trade row between the U.S. and China. Alibaba stock, as of Friday Oct. 11, resides more than 11% below its 52-week high with a nasty June tumble accounting for most of that loss.
Fortunately, since the June lows, Alibaba has made a series of higher highs and higher lows, indicating a return to old highs and beyond is possible. In positive, broad fundamental news, Alibaba jumped 4.14% last Friday on volume that was more than 25% above the daily average amid headlines that the world’s two largest economies are finally making positive headway on what has been a strained trade relationship.
Speaking of positive fundamentals, not only are Chinese retail sales growing, indicating the world’s second-largest economy is doing an admirable job of turning toward domestic consumption, but e-commerce there is booming and that’s long been one of the primary catalysts for BABA stock.
Online sales there are expected to swell 30% this year to $1.989 trillion, according to eMarketer.
“By the end of this year, China will have 55.8% of all online retail sales globally, with that figure expected to exceed 63% by 2022,” said the research firm. “Alibaba will lead ecommerce sales in China with a 53.3% share.”
What Makes Alibaba Tick
As seasoned investors well know, as China’s equity market has grown, so have comparisons of companies there to American counterparts and many of those comps are drawn from the consumer cyclical sector.
For its part, Alibaba is often compared to Amazon and though accurate to an extent, the Chinese company also has some Alphabet (NASDAQ:GOOG GOOGL) in it, some eBay (NASDAQ:EBAY) and even some FedEx (NYSE:FDX).
According to the Harvard Business Review:
“[Alibaba is] what you get if you take all functions associated with retail and coordinate them online into a sprawling, data-driven network of sellers, marketers, service providers, logistics companies, and manufacturers,” “In other words, Alibaba does what Amazon, eBay, PayPal, Google, FedEx, wholesalers, and a good portion of manufacturers do in the United States, with a healthy helping of financial services for garnish.”
Indeed, Alibaba stock and the company itself are growth stories. Just over five years removed from its initial public offering (IPO), Alibaba is a $452 billion company, making it one of the seven most valuable Internet firms in the world.
However, Alibaba stock trades at just 24.51x forward earnings. Amazon, which is also among the world’s seven most valuable internet firms, trades at more than 45x forward earnings.
“Why has so much value and market power emerged so quickly? Because of new capabilities in network coordination and data intelligence that all these companies put to use,” according to Harvard. “The ecosystems they steward are vastly more economically efficient and customer-centric than traditional industries.”
Bottom Line: Alibaba Stock Is a Winner
Like Amazon does in the U.S., Alibaba faces competition in its core eCommerce market and it’s reasonable to expect the company will cede some market share in online retail in the years ahead. However, the company’s diversified revenue streams, impressive margins and high penetration rates should continue supporting Alibaba.
“Alibaba’s marketplace monetization rates have generally been on an upward trend despite recent macro uncertainty, indicating that sellers are increasingly engaging with Alibaba’s marketplaces and payment solutions,” said Morningstar in a note out earlier this month. “Retail revenue per active user continues to outpace other China rivals, owing in part to an emphasis on higher-quality merchants.”
Pinpointing exactly when Alibaba stock makes its next epic move is difficult, but at current levels, it’s not a stretch to say the stock is undervalued by 30% to 40%.
Todd Shriber does not own any of the aforementioned securities.