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BABA Stock Remains a Great Way to Play Megatrends in China

Tom Taulli

Despite the impact of the U.S.-China trade war, Alibaba Group (NYSE:BABA) stock has done quite well for the year. Consider that the return for BABA stock is about 30% for 2019. This is actually more than twice as strong as the average for the past five years.

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And even with this strong run-up for 2019, I still think there’s more room on the upside. In fact, BABA stock is a great way to play some of the most powerful secular growth trends in China.

Of course, there is the company’s dominant position in the lucrative e-commerce category. BABA’s marketplaces — which include giants like Taobao and Tmall — have 674 million annual active consumers as well as 755 million mobile MAUs (Monthly Active Users). And while the Chinese economy has come under pressure, there continues to be robust demand for BABA’s offerings. In the latest quarter, revenues jumped by an impressive 42% to $16.741 billion and the operating cash flows came to $5 billion.

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Then again, there continues to be an inexorable increase in the middle class in China, providing fuel for BABA. The population is expected to hit 600 million by 2022. What’s more, the ecommerce market in China is projected to reach $839.54 billion by 2021.

Another key for success — which should help drive Alibaba stock — is the strategy of building a powerful ecosystem, which helps to bolster the competitive moat. Part of this has been through equity investments while other deals have been mostly joint agreements. Regardless of the form, BABA has been able to enhance its platforms by leveraging the services of third parties.  For example, the company has been able to expand into the delivery market by forging a major alliance with Starbucks (NASDAQ:SBUX).

Or, look at a deal with ByteDance. The company has launched a red-hot social app, called TikTok, that has beat out large US operators like Snap (NYSE:SNAP), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Facebook (NASDAQ:FB). But ByteDance has a TikTok for China as well, called Douyin, which has caught fire (there are 320 million daily active users).

As for BABA, ithas implemented its ecommerce buttons on the app, which should result in significant revenues in the coming years. Actually, KeyBanc analyst Hans Chung estimates that the they could hit a staggering $36.6 billion.

But Alibaba stock is definitely much more than ecommerce. The company also has businesses in categories like media, entertainment and video. Although, the cloud segment could have the most impact. BABA has essentially borrowed straight from the Amazon (NASDAQ:AMZN) playbook.


BABA has the technical expertise and infrastructure for a strong platform. The company also has a massive base of business customers to cross-sell to.

During the latest quarter, the cloud business for BABA posted a 66% increase in revenues to $1.1 billion. Note that there were more than 300 new products and features launched, such as for security, AI (Artificial Intelligence) and data intelligence. For the most part, the cloud business is still in the nascent stages and should be a long-term catalyst for growth.

Bottom Line On Alibaba Stock

Now Alibaba Stock still has notable risks that go beyond the trade war. One is that the competitive environment is intense in China, with tough rivals like JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD). There are also many startups.

Another risk is that the legendary co-founder Jack Ma has stepped down as CEO. He was the creative and inspirational mastermind of the huge success of the company.

Yet I think these risks are manageable. The current CEO, Daniel Zhang, has strong skillsets as a disciplined operator — which will be essential as BABA must manage a multitude of complex businesses.

And besides, the stock price is at reasonable levels, with the forward price-to-earnings ratio at 20x. This is a pretty good level in light of the expected strong growth the company is likely to deliver.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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