This has been a rewarding year for Alibaba (NYSE:BABA) investors. BABA stock is 46% higher year-to-date even with headwinds of economic weakness and the trade war. I believe that 2020 and beyond will be no different for Alibaba stock.
As Alibaba Group gets bigger, the stock is positioned for a multi-year rally. Of course, there will be corrections, but I strongly believe that the uptrend will sustain, making Alibaba stock worth considering for the core portfolio.
Since BABA stock has surged by 46% in 2019, it makes sense to look at the valuation. The stock currently trades at a forward price earnings ratio of 27.8. This is attractive as compared to JD.com (NASDAQ:JD), which trades at a forward PE of 31.1. Amazon (NASDAQ:AMZN) is much bigger in terms of market capitalization and revenue. However, it can still be compared and Amazon stock trades at a forward PE of 85.27. Clearly, Alibaba is undervalued and attractive for exposure even at current levels.
However, my bullish view on Alibaba stock is not just based on the valuation perspective. China is in the midst of a consumption boom that will continue to benefit Alibaba.
In addition, Alibaba Group has expanded its presence in Southeast Asia, which can be another game-changer. Analyst estimates indicate that earnings can grow at a CAGR of 25.8% for the next five years. This provides an insight into the business growth potential on a sustained basis.
The Big Potential in China
I mentioned that China is in the midst of a consumption boom. To provide some perspective, Alibaba Group generated $38.4 billion of gross merchandise volume during the shopping festival on Nov. 11. In comparison, Black Friday sales in the United States were $7.4 billion. It is also estimated that Cyber Monday sales will be $9.4 billion.
Of course, per capita consumer spending is higher in the United States, but I believe that China’s per capita consumer spending will continue to increase in the coming decade.
According to a report by Boston Consulting Group, China’s high net worth and ultra-high net worth individuals are growing at a CAGR of 22%. In addition, China’s middle class is likely to reach 550 million by 2022. This is one-and-a-half times the population of the United States.
To add to the positives, income growth in China’s rural areas has been robust. Alibaba has been focusing on increasing rural penetration and that opens up s completely new revenue stream. Alibaba Group’s rural initiative, Rural Taobao, will expand to 1,000 counties and 150,000 villages by 2021. I believe that this will help Alibaba sustain strong top-line and bottom-line growth.
Ant Financial Can Be a Game-Changer
Alibaba Group owns 33% stake in Ant Financial and I believe that this is another major upside trigger for Alibaba stock. Ant Financial is already valued at $150 billion and a 33% stake implies $50 billion in stake value for Alibaba.
Ant Financial currently has 1.2 billion users and the company intends to increase the number of users to 2.0 billion in the next decade. This could easily imply doubling of valuation as Ant Financial expands aggressively outside China. In addition, a potential IPO will also result in value unlocking.
Recently, Ant Financial partnered with Postal Savings Bank of China on digital payments, online lending, rural finance and corporate finance. In addition, the partnership will work on fintech innovations. Therefore, Ant Financial is still at an early stage and tapping markets like China and India will imply sustained growth.
My Final Verdict on Alibaba Stock
Alibaba Group has multiple business growth triggers. This includes core commerce growth in China and Southeast Asia, cloud business growth and expansion of financial services.
This will help Alibaba Group sustain strong top-line growth and free cash flows will also swell in the coming years. Alibaba also has robust financial flexibility to pursue inorganic growth and the company has been active on that front.
Considering these factors, BABA stock is attractive and worth holding in the long-term portfolio. Even after the upside in the last few quarters, the stock trades at reasonable valuations.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
