In the last year, sharp upsides for Alibaba (NYSE:BABA) stock have failed to sustain it. However, this has little to do with the company’s fundamentals and business outlook. The trade war has impacted BABA stock’s valuation and might continue to do so in the foreseeable future. I believe that this is a good opportunity for long-term investors to gradually accumulate BABA stock.
I believe a trade war resolution is imminent. Both economies are feeling the heat. And Alibaba’s growth opportunity is not limited to core commerce.
Chairman of Alibaba Group’s Academic Council Ming Zeng puts things in perspective through an article in the Harvard Business Review.
“Alibaba today is not just an online commerce company. It is what you get if you take all functions associated with retail and coordinate them online into a sprawling, data-driven network of sellers, marketers, service providers, logistics companies, and manufacturers. In other words, Alibaba does what Amazon, eBay, PayPal, Google, FedEx, wholesalers, and a good portion of manufacturers do in the United States, with a healthy helping of financial services for garnish.”
So what areas beyond core commerce will drive growth for BABA stock?
Cloud Computing and AI Chips
Alibaba’s cloud business has already been growing at a scorching pace. For the June quarter, the cloud business registered 66% revenue growth. While the segment reported a negative EBITDA margin of 5%, I believe that the best part of growth is still to come.
A major development in the recent past has been the launch of its AI inference chip. The chip will be initially used to enhance Alibaba’s cloud computing power. However, the company will leverage on its AI capabilities to provide superior technology infrastructure. This should help in accelerating core cloud business growth and gaining further market share.
The development of the AI chip is also relevant in the context of the trade war with the United States. China is significantly behind the U.S. when it comes to production of high-end chips. However, the same does not hold true for AI chips.
Alibaba is on the forefront, and I believe that the potential expansion in application of AI chips can give the company multiple growth opportunities. Just as an example, Nvidia (NASDAQ:NVDA) has been making inroads in the healthcare, autonomous driving and retail with GPU-accelerated AI solutions.
Freshippo Business to Gain Traction
Freshippo is the fresh food business segment of Alibaba, and it has been expanding at a robust pace. The brick-and-mortar model is a shift from the company’s traditional e-commerce model.
In terms of growth, the company has expanded to 171 stores in 2019 from 64 stores in 2018. With double-digit same-store sales growth and declining operating costs, the business looks promising.
Freshippo is looking to expand beyond tier one city areas and that should add to the long-term growth momentum.
From an investor’s perspective, it is worth noting that Freshippo can be potentially spun off as a separate business. The spinoff and resulting IPO can translate into value — and Freshippo has the potential to garner healthy valuations.
My Final Thoughts on Alibaba Stock
BABA stock has failed to break out on the upside, but the company’s business fundamentals remain strong. This presents a good opportunity for investors to accumulate Alibaba stock with a medium- to long-term investment horizon.
The company’s core commerce segment will remain the cash cow. However, cloud computing, Freshippo and the digital and media entertainment segment hold immense growth triggering potential.
At the same time, within the core commerce segment, the company’s expansion in Southeast Asia will deliver positive surprises. Overall, Alibaba stock will continue to grow at a healthy pace which will translate into meaningful stock upside.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
