With Alibaba (NYSE:BABA) spreading its wings, the past year has been rewarding for shareholders. BABA stock has surged by 53% over the past year, backed by strong fundamental developments. I further believe that the stock is well positioned to touch $300 within the next 12 months. This implies an upside of 30% from current levels. This column will discuss the factors that will trigger sustained positive momentum for Alibaba stock.
Besides company-specific factors, easing of trade tension between the United States and China will likely support stock upside. Lower trade tension is likely to boost consumer confidence and consumption spending. It is worth noting that for January to November 2019, online retail sales in China increased by 16.6% on a year-on-year basis. Therefore, even with lower GDP growth and trade tension, online sales were robust. I expect higher year-on-year sales growth in 2020, which will benefit Alibaba.
Ant Financial Will Boost Valuations
Ant Financial is already a $150 billion company, and Alibaba holds 33% equity stake. This values Alibaba’s stake at $50 billion. I believe that valuations will continue to swell for Ant Financial; a potential initial public offering in the next 12-24 months could translate to value unlocking.
In December 2019, Ant Financial and Vanguard Group established an investment advisory joint venture in China. The key point to note is that the service will accept a minimum investment of just $113.65. This will make the advisory service accessible to millions, with a big market to be tapped.
It was also reported in December that Ant Financial has applied for a digital banking license in Singapore. Ant Financial also has stake in Paytm, which is India’s largest company in the mobile money sector.
The point I am trying to make here is that Ant Financial already has presence in China and India, home to a collective 2.5 billion-plus people. As the company expands services, there is immense growth potential.
Of course, Ant Financial is looking beyond these two countries for further expansion. The company has planned a $1 billion unicorn fund for India and Southeast Asia to invest in online payment related technologies.
Overall, Ant Financial has the potential to be a game changer for Alibaba in terms of unlocking value in the coming years.
Core Commerce Business Growth
For Alibaba, core commerce remains the key cash flow driver. In China, penetration into tier two and tier three cities is likely to ensure strong growth.
However, e-commerce growth is not limited to China. Alibaba has made significant inroads in Southeast Asia through Lazada. Currently, the company has 50 million annual active customers in the region. It is worth noting that e-commerce penetration in Southeast Asia was just 3% in 2018. Therefore, there is potential for robust growth over the next decade.
Another market that Alibaba has targeted is Europe. The company has already opened its first store in Madrid. Further, the e-commerce platform will compete with Amazon (NASDAQ:AMZN). It’s still the early days of company’s presence in Europe though, and it remains to be seen if Alibaba can gain market share.
It does seem that Alibaba is embarking on an ambitious global expansion program. The company does have financial resources for global expansion and this should help strong top-line growth sustain.
My Final Thoughts on Alibaba Stock
Besides growth in core commerce and the financial sector, Alibaba is also well positioned for strong growth in cloud computing. In China, Alibaba has a leading cloud market share of 47.3%. In the worldwide cloud market, Alibaba has a market share of just 5%. However, that’s likely to increase with Alibaba likely to dominate in Asia.
From a financial perspective, Alibaba reported free cash flow of $4.3 billion for the latest quarter. This implies an annualized free cash flow of $17.2 billion. Alibaba therefore has ample financial muscles for organic and inorganic growth.
Overall, Alibaba stock is attractive for 2020. I also believe that the company is well positioned to deliver healthy earnings growth in the years to come. According to analyst estimates, earnings growth is likely to average 25.8% over the next five years. This makes Alibaba stock worth considering for the core portfolio.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.