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Alibaba Poised for a Move to $300 in 2020

Alibaba (NYSE:BABA) finished 2019 at $212.10 a share. Alibaba stock has turned positive for the year, trading at about $220. 

baba stock
Source: Nopparat Khokthong / Shutterstock.com

Since China’s e-commerce leader went public on the New York Stock Exchange in September 2014 at $68 a share, it has traded above $200 on four occasions. This last occurred in May.

Alibaba appears to be benefiting from the novel coronavirus, much like Amazon (NASDAQ:AMZN), its U.S. e-commerce rival. And like Amazon, while sales are jumping, the cost of these gains has come at the expense of profits. Unfortunately, it costs more money to be an industry leader during a pandemic. 

But that’s OK. Despite Covid-19, Alibaba still managed to generate $1 billion in operating profits in January, February, and March on $16.1 billion in sales. 

“Despite a challenging quarter due to reduced economic activities in light of the COVID-19 pandemic in China, we achieved our annual revenue guidance of over RMB500 billion,” stated chief financial officer Maggie Wu in Alibaba’s May 22 earnings release. 

“… Although the pandemic negatively impacted most of our domestic core commerce businesses starting in late January, we have seen a steady recovery since March. Based on our current view of Chinese domestic consumption and enterprise digitization, we expect to generate over RMB650 billion in revenue in fiscal year 2021.”

While it hasn’t been easy for Alibaba in recent months, it appears as though it’s been able to execute at a very high level during the pandemic. That is excellent news if you’re a long-term shareholder. 

The question now is whether the company’s got enough gas in the tank to make a move to $300 before the end of the year. 

I think it does. Here’s why.

Alibaba Revenues Continue to Diversify

InvestorPlace contributor Matt McCall recently discussed several fundamental and technical reasons why Alibaba stock is a buy. McCall includes a chart in his article that shows nine other revenue streams for the company besides its Chinese retail business. Its retail operations, including e-commerce and brick-and-mortar, generate 62% of its overall revenue

The biggest of those other revenue streams is cloud computing, which accounted for $5.7 billion in fiscal 2020, or 8% of its annual revenue of $72.0 billion. As McCall’s chart suggested, Alibaba’s cloud computing revenue in the fourth quarter of fiscal 2020 was $1.7 billion or just less than 11% of the company’s $16.1 billion in overall revenue. 

Everyone and his dog has been saying cloud computing was a big part of the company’s growth. Alibaba’s results in the fourth quarter illustrate why investors shouldn’t underestimate the company’s ability to grow beyond Chinese e-commerce routes. 

Before you know it, digital media & entertainment and logistics services could be Alibaba’s next revenue streams to account for more than 10% of its overall revenue. Diversification will continue to pay dividends for Alibaba shareholders. 

Alibaba Cares About Governance and Succession

In early May, I discussed how the company’s president of its Taobao and Tmall businesses was forced off the company’s 38-person partnership committee and demoted to vice president. The executive provided preferential treatment for a female social media influencer at a company that did business with Alibaba. 

My take was that Alibaba had taken swift action to ensure all stakeholders knew that it was serious about impropriety. Meanwhile, officials are confident that even a rising star could be knocked off track without affecting the company’s future. 

No one is above basic corporate rules. That’s especially true since the Luckin Coffee (NASDAQ:LK) fiasco, which put U.S.-listed Chinese companies under the microscope. 

Just as Jack Ma was able to step away from Alibaba, the company will be fine without Jiang Fan serving on its partnership committee. 

If you believe in stakeholder transparency, Alibaba’s done everything it can to retain the confidence of shareholders, employees, customers and suppliers, and that is excellent news if you own its stock.

The Bottom Line on Alibaba Stock

As U.S.-listed Chinese stocks go, Alibaba remains the creme de la creme. It’s the gold star of Chinese investments. With or without Covid-19, its future potential remains bright.

As mentioned earlier, Alibaba expects its 2021 revenue of 650 billion yuan, which translates into $92 billion in greenbacks. In 2020, the company had an operating margin of 18%. Even at half that, Alibaba would still generate more than $8 in operating profits in 2021.   

If I could only own one Chinese company, it would likely be Alibaba. Whether the company gets to $300 by the end of 2020 depends on how the markets perform for the rest of the year. If it does well, I have no doubt it could test $300.

Regardless, Alibaba is a buy.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/is-alibaba-ready-for-a-move-to-300-in-2020/.

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