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Alibaba Stock Well-Positioned to Benefit From China’s Consumption Boom

Faisal Humayun

Even as the global economy weakens, there are opportunities to add stocks in a long-term portfolio. Alibaba Group (NYSE:BABA) is among the top stocks to consider with a three-to-five-year investment horizon. This coverage on Alibaba stock will discuss the factors that will help the e-commerce giant sustain robust growth in the coming years.

Alibaba stock is almost at the same level it was in August 2018 even after strong quarterly results and attractive valuations. I believe that this sideways movement is a good opportunity to accumulate the stock. A break-out on the upside is inevitable in the foreseeable future.

China’s Consumption Boom and BABA Stock

China’s economic downturn is primarily due to manufacturing and production excesses. China’s consumption sector still remains healthy.

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To put things into perspective, China will be the largest retail market in 2019. Further, it is expected that between 2019 and 2024, China’s retail sector will grow at a CAGR of 10.6%.

According to a report from McKinsey & Company, 78% of GDP growth in the first nine months of 2018 was driven by consumption. The report also states that 6% GDP growth in 2019 is likely only if the consumption boom sustains.

Therefore, with consumption critical for growth, the government will support policies that trigger the consumption boom. In addition, I believe that the Chinese Yuan will appreciate in the coming years which will increase the purchasing power of consumers.

Overall, China is moving from a manufacturing boom to a consumption boom. Very similar to the manufacturing boom, this trend is likely to sustain in the coming decade.

Alibaba Group and BABA stock are well-positioned to benefit from the boom with a healthy growth in active users.

Koala Acquisition a Alibaba Stock Upside Catalyst

There are reports that Alibaba Group will be buying NetEase’s (NASDAQ:NTES) cross border e-commerce unit for $2 billion.

The acquisition can be a potential stock upside catalyst. Koala is focused on imported goods and the market for foreign luxury brands is expanding in China.

I must mention here that “Tmall Luxury Pavilion” has already been attracting premium global brands. As an example, Michael Kors announced that it will open its digital flagship store on Tmall. Therefore, Koala will serve as a growth catalyst for luxury and imported brands offering to consumers.

According to Bain & Capital, China’s luxury good market posted growth of 20% for 2016-17 and 2017-18. Further, the report suggests that overseas purchases will continue to surge in the coming years. As I mentioned earlier, a possibly stronger Yuan will also contribute to demand for overseas goods. The acquisition would therefore make sense for Alibaba Group.

It is worth noting that JD.com (NASDAQ:JD) has also been focusing on exclusive agreements with international brands. In the second quarter, Prada Group, the Italian fashion house, agreed to open a first-party flagship stores on JD.com. There have been several other flagship store agreements with premium brands.

The key is, the retail boom will drive interest from national and international brands. From the perspective of Alibaba, this will translate into higher revenue, EBITDA margin and free cash flows.

BABA Has Strong Growth, Attractive Valuations

Alibaba stock will continue to report robust growth with sustained upside in core commerce and with financial muscles for inorganic growth. My view is underscored by the point that analyst estimates suggest average 5-year earnings growth at 22.1%.

Considering the potential growth trajectory, BABA stock is trading at attractive valuations. The stock currently trades at a forward PE of 20.6 as compared to a forward PE of 28.45 for JD.com.

I therefore expect the stock to trend higher in the coming quarters.

Final Words on BABA Stock

Alibaba is an attractive stock for the long-term considering the growth in China’s retail sector. Besides having a leading market share, Alibaba has the financial flexibility to pursue organic and inorganic growth.

Core commerce will continue to drive revenue and EBITDA. Further, investment in cloud computing is a potential long-term value creator.

Alibaba will also create shareholder value through share repurchase and potential dividends. Robust free cash flows provide the company with the required liquidity.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

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