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Is Alibaba a Buy?

Joe Tenebruso, The Motley Fool

Alibaba Group (NYSE: BABA) has built a dominant position atop China's $1.3 trillion e-commerce market. In the process, it has become one of the world's most valuable businesses, with a market capitalization of approximately $400 billion.

Yet Alibaba's stock has shed nearly a quarter of its value in recent weeks, as fears of a worsening trade war between China and the United States has spooked investors.

Could the stock's decline be a sign that more trouble lies ahead? Or is it a buying opportunity for long-term investors?

A gold bull on top of a keyboard button labeled "Buy"

Image source: Getty Images.

A dominant competitive position

Alibaba commands more than 50% of the Chinese e-commerce market, according to eMarketer. Its closest rival, JD.com, has only a 16% share. Moreover, international companies -- such as Amazon.com and Walmart -- have found it difficult to compete effectively, and have largely ceded the market to Alibaba and its Chinese brethren.

Alibaba's Taobao marketplace provides a platform for individuals and small businesses to sell goods online to consumers in China and its surrounding regions. Taobao has more than 500 million active customers, making it the largest e-commerce website in the world. Alibaba's Tmall, meanwhile, helps Chinese and international companies sell higher-end branded goods in China. Large corporations such as Nike and Estee Lauder use Tmall to reach China's massive consumer base. 

Across all its marketplaces, Alibaba serves more than 650 million active customers. Yet despite its already huge size, Alibaba continues to expand its reach at an impressive rate. The e-commerce giant gained 102 million customers in fiscal 2019, representing a year-over-year increase of 18%. 

Robust growth

As the industry leader, Alibaba is in a particularly valuable position. China's online retail market is not only the largest in the world, but also one of the fastest-growing. EMarketer expects the country's e-commerce sales to rise 30%, to nearly $2 trillion, in 2019. 

In turn, China's rapidly expanding e-commerce market is fueling Alibaba's growth. The online retail titan's revenue and adjusted net income increased 51% and 12%, respectively, to $56 billion and $14 billion, in fiscal 2019. 

Alibaba's earnings growth would be even more impressive were it not for its heavy investments in areas such as cloud computing, digital entertainment, and food delivery. And while these businesses weigh on Alibaba's profitability, they also help to strengthen and expand its ecosystem of services.

Notably, Alibaba Cloud -- which enjoyed 84% revenue growth in fiscal 2019 -- is the leading cloud-computing platform in China. Alibaba also holds a leading position in food delivery in China, thanks to its acquisition of Ele.me in 2018.

Better still, Alibaba also owns a 33% stake in Ant Financial. Ant Financial operates Alipay, which, together with Tencent's WeChat Pay, controls more than 90% of the digital payments market in China. 

All told, Alibaba's various businesses and investments give it many ways to win -- and for investors to profit -- in the years ahead.

A discounted price

Despite these intriguing growth prospects, investors have sold off Alibaba's shares in recent months. Escalating tensions between the U.S. and China and fears that retaliatory tariffs could slow economic growth in both countries have weighed on Alibaba's stock price. But it's still possible that trade talks will result in a compromise, and any positive developments toward a resolution could lead to a sharp rebound in Alibaba's share price.

Moreover, Alibaba Executive Vice Chairman Joseph Tsai said he believes the market is overreacting to the trade war. Tsai does not think tariffs will have a major impact on China's growth. Alibaba, for its part, expects its revenue to rise another 33% in fiscal 2020. If Tsai is correct, and Alibaba is able to reach its revenue goal, it will go a long way toward lessening investors' concerns regarding an economic slowdown in China.

Yet with fears of a trade war still present in the market, Alibaba's shares can currently be had for only about 23 times forward earnings estimates. That's a bargain price for a competitively dominant business that's projected to grow earnings by more than 24% in the year ahead. 

All that is to say potential investors may want to use this recent pullback as an opportunity to buy shares in Alibaba.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, JD.com, Nike, and Tencent Holdings. The Motley Fool has a disclosure policy.