Chinese technology behemoth Alibaba (NYSE:BABA) stock is a tricky one to evaluate.
On one hand, it is hard to ignore the explosive growth potential of the world’s largest e-commerce company, which has online sales that dwarf Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) and Walmart (NYSE:WMT) combined, not to mention its market leadership in artificial intelligence and cloud computing.
On the other hand, as a Chinese-controlled multinational, Alibaba stock has been roiled by the ups and downs of U.S.-China relations over the past few years, as well as global trade tensions and the accounting scandals that seem to plague publicly traded Chinese companies.
Investors considering taking a position in BABA stock will have to carefully weigh the upside potential against what is likely to be ongoing volatility in the share price.
One Billion Consumers (and Counting)
To be sure, Alibaba is one of the world’s most ambitious companies, expanding its businesses in cloud computing, digital media and AI. Currently, more than 80% of Alibaba’s revenue comes from its retail and e-commerce businesses, which subsidize the company’s emerging business units that include everything from online gaming and smart speakers to web browsers, streaming services and digital payment platforms.
Alibaba is the undisputed king of e-commerce in China and throughout most of Asia, which is why many analysts refer to the company as the “Chinese Amazon.” However, in many of its other businesses, Alibaba faces stiff competition from other Chinese players such as Tencent (NASDAQ:TCEHY) (cloud computing, digital payments and music streaming), and Baidu (NASDAQ:BIDU) (AI and online search engines). In fact, outside of cloud computing and its core retail and e-commerce business, Alibaba is not the market leader in any of its business segments.
Nevertheless, the company is pulling out all the stops to gain ground on its competitors. Alibaba has set itself the ambitious target of serving more than one billion Chinese consumers (up from 780 million currently) and generating $1.4 trillion in revenue across all of its platforms within the next five years. By 2036, Alibaba wants to serve 2 billion consumers worldwide. While those kinds of targets might seem overly ambitious to some people, the company has been making headway towards reaching its goals. Revenue from its cloud computing business rose 58% in the last quarter compared to a year earlier, and it has forecast that its total revenue will rise 28% in the current 2021 fiscal year.
Washington Tensions
Despite the positive story, BABA stock seems to get pulled down every time tensions flare-up between Washington and Beijing, or when there is a scandal involving an unrelated Chinese company. Alibaba recently had to publicly reassure U.S. investors that it has no plans to delist its shares from the New York Stock Exchange after the Senate passed a bill targeting Chinese stocks listed on U.S. exchanges. Alibaba assured investors that it will dutifully comply with any new listing and accounting regulations in the United States.
BABA stock also suffered in the days following the April disclosure by China’s Luckin Coffee (NASDAQ:LK) of widespread accounting fraud that involved more than $300 million of fake transactions. BABA’s stock price fell from a high of $206.70 to $191.15 in the days after the scandal broke internationally. Alibaba’s shares even seem to fluctuate each time protests flare-up in Hong Kong or a trade threat is made against China from the White House.
In recent weeks, Alibaba’s share price has seesawed between a high of $217.20 and a low under $199. A look at a chart of BABA stock literally shows a rollercoaster ride driven by international tensions.
Positive Shareholder Returns
Yet for all the volatility, it is extremely difficult to ignore both the track record and future upside of BABA stock. Alibaba’s share price has nearly tripled since the company went public in 2014 at $68 a share. At the time, it was the largest ever initial public offering. Today, BABA stock is one of the most widely held securities by U.S. hedge funds, and many analysts say that owning the stock is the best way to gain exposure to the Chinese economy and its 1.4 billion citizens.
Analysts remain extremely bullish on BABA stock, with many calling it a potential “millionaire maker.” Among 27 Wall Street analysts with ratings and price targets for Alibaba, the average 12-month price target is $246.36 per share, suggesting that the stock has a possible upside of 24.24%. The high price target for BABA stock is $290 a share and the low price target is $197.70. There is currently one hold rating, 25 buy ratings and one strong buy rating for the stock, resulting in a consensus rating of buy. There are no sell ratings.
Bottom Line on BABA Stock
Despite geopolitics, trade tensions and the speculative nature of many publicly traded Chinese companies, Alibaba stock is too good an investment opportunity to be ignored. The company is involved in too many leading edge technologies and growth areas to be discounted because of forces that are largely beyond the control of management.
Investors wanting exposure to China and Asia would be wise to invest in BABA stock while it is still relatively affordable. With emerging opportunities and continued growth on the horizon, Alibaba is a worthy addition to any portfolio.
As of this writing, Joel Baglole held shares of Alibaba Group Holding Ltd.
