Alibaba (NYSE:BABA) simply doesn’t get enough respect. That may sound like a crazy statement, given that BABA stock has a market capitalization just shy of $800 billion. But I stand by it.
Alibaba’s Investor Day last week highlights my point. The company released staggering, almost unfathomable data. Investors did pay attention, at least somewhat: Alibaba stock closed the week up 6.3%. But BABA still trades off its highs and at a significant discount to American peers on most fundamental metrics.
Indeed, even the fact that “Investor Day” was a three-day event shows what a remarkable company this has become. It takes that long to cover a company with this kind of reach and this many intriguing, attractive businesses.
Even an $800 billion valuation doesn’t incorporate the value of all those businesses and the importance of that kind of reach. BABA stock will move higher and Investor Day shows why.
An Unparalleled Reach
Simply looking at the table of contents for Investor Day gives a sense of just how big Alibaba is at this point. This is not just an e-commerce play anymore.
To be sure, the core e-commerce business serving Chinese consumers remains impressive. Between Taobao, Tmall, and Alimama, Alibaba has three of the best online retail marketplaces in Asia. For now, those businesses still are driving the company’s impressive growth and free cash flow generation.
But Alibaba has become so much more. A B2B (business-to-business) offering is growing quickly and serves the wholesale market both domestically and for export. Lazada provides an e-commerce marketplace in Southeast Asia.
The Digital Media & Entertainment segment spans music, movies, and television. Grocery chain Freshippo is merging online and in-store shopping, and increased same-store sales 32% year-over-year in the most recent quarter.
Cainiao Network offers logistics solutions. Alibaba’s cloud business is leading the way in Asia. Last month, Alibaba even launched a new manufacturing platform which it had kept secret for three years. The completely digital factory could revolutionize manufacturing in the country.
All of these businesses outside the core online shopping platforms are intriguing. Exciting, even. They’re valuable, too. This is not a business whose growth is going to end any time soon. Yet Alibaba stock, which trades at about 25x forward earnings, is priced as if it will.
Staggering Numbers
What’s crazy is that Alibaba has the opportunity to become bigger than what it is — when what it is already is staggeringly large.
Per the Investor Day presentation, Alibaba as a whole cleared 1 billion annual active customers in the June quarter. Almost 200 million are located outside of China.
1 billion is almost three times the entire population of the United States. In fact, it’s almost equal to the population of the U.S. plus all of Europe.
Those customers might not be as valuable on an individual basis as higher-income users in the West. But, as a whole, they drive a staggering amount of activity. Alibaba’s “digital economy” gross merchandise value (i.e., the total value of goods that pass through Alibaba’s platforms) is over $1 trillion during the last twelve months.
That’s 18% of China’s retail sales. Five years ago, Alibaba had “just” 10% of the total.
The Case for BABA Stock
What BABA stock offers is an unique, and possibly unprecedented, combination of size and growth. It’s one of the world’s biggest companies, yet its growth looks like that of a much younger company.
Trailing twelve-month revenue is up 33.5% from where it was a year ago. Profit and cash flow margins actually have expanded over that stretch, even though Alibaba is investing behind so many new businesses.
And yet the stock trades at just 25x earnings. There are American stocks with 3% or 5% profit growth trading at similar multiples.
That’s why I say Alibaba stock doesn’t get enough credit. The stock, by the standards of this market, is ridiculously cheap. Yet its performance, by the standards of almost any market, is jaw-dropping.
Some investors might see too many risks here. There are worries about a property bubble in China. Skeptics claim the company’s macroeconomic numbers are inflated.
But investors are paying up dearly for other Chinese stocks that are posting strong growth. And Alibaba at this point is not the fraud that a few Chinese companies have proven to be for one simple reason: it’s too big. Inflated numbers would be far too obvious.
That aside, every stock has risk. It’s possible that another has the potential rewards of BABA, however. Size, growth, valuation … Alibaba stock has it all.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
