Is the Alibaba Group Holding Ltd (BABA) Stock Hype Too Good to be True?
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It’s been a bumper year for Chinese e-commerce giant and holding company Alibaba Group Holding Ltd (NYSE:BABA). BABA stock is up more than 73% in 2017 yet analysts are still overwhelmingly bullish on the company’s potential.
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Dubbed the “Amazon of China”, investors have been flocking to Alibaba stock, seeking the same impressive growth that Amazon.com, Inc. (NASDAQ:AMZN) delivered on its own rise to the top.
Here’s the thing: Alibaba is not Amazon, in ways both good and bad. It’s important to realize that the two are not as similar as media coverage might have you believe.
On the good side, Alibaba appears to have its hand in far more honey pots than Amazon. While BABA is the Amazon of China, it’s also the Twitter Inc (NYSE:TWTR), the YouTube and the Apple Inc. (NASDAQ:AAPL) of the world’s second-largest economy, as well.
Add to all that the firm’s rising cloud service business and online payments arm and you see one of the biggest draws for BABA stock — the company is essentially doing business in every one of the fastest-growing sectors of China’s e-commerce marketplaces.
Still, Alibaba has had very little impact outside of China, something that could create a growth problem down the line. Amazon, on the other hand, operates successfully around the world. Not only that, but the two operate under completely different business models and Amazon’s massive distribution and logistics network dwarfs BABA’s by comparison.
Alibaba Growth Estimates
Perhaps the most-talked about aspect of BABA stock is the company’s growth potential. The firm’s most-recent earnings report showed that revenue increased by 51% from the previous year, free cash flow was up 116%, and earnings per share rose 83%. Many are comparing Alibaba’s growth potential to that of a startup, which is what makes it such an appealing buy.
For Alibaba, it may not be an obstacle that for years to come it is confined to China — the largest retail market in the world — and that online commerce only makes up about 15 percent of that total. That means there’s tons of room for expansion, especially when you take into account how quickly China’s middle class is expected to grow.
Are Those Figures Reliable?
However, as fellow InvestorPlace contributor Josh Enomoto pointed out earlier this month, the “growing middle class” forecasts appear to have very little concrete data to back them up.
What economic data are these forecasts based on?
To take that question even further, it has to be said that investing in a Chinese company that does virtually all of its business within China is risky on its own. China hasn’t been known for being completely transparent with the economic picture it paints of Beijing, so that makes owning a stock like BABA risky because there is a great deal of uncertainty.
The Bottom Line on BABA stock
Alibaba stock has been performing well over the past year and most investors are expecting to see it go higher before 2017 is over. On paper, the company looks like a great buy and its growth potential can’t be ignored.
However, BABA stock carries a lot more risk than other e-commerce shares, and investors need to be comfortable with a level of uncertainty if they are going to add Alibaba stock to their portfolios.
If you believe that China’s middle class is growing exponentially and you want a stake in the Chinese e-commerce market, Alibaba is a great place to start, but to me, there are too many question marks to make BABA stock a solid buy.
As of this writing, Laura Hoy was long AAPL and AMZN.
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