Down 5% in the last year and trading at a forward price-earnings ratio of about 20, Alibaba (NYSE:BABA) has been hurt by the U.S.-China trade war and uncertainty about China’s economic outlook. As those fears clear, though Alibaba stock will regain its shine.
Source: Charles Chan Via Flickr
Now that Washington and Beijing have reached a trade-war truce and China has introduced an economic stimulus, fears about macro issues derailing Alibaba stock should recede.
Moreover, BABA stock has multiple other positive catalysts that should drive BABA stock price higher over the medium-to-long-term.
Here is a list of the four most important positive catalysts of Alibaba stock.
1. Positive Macro Trends and BABA Stock
Although my prediction about Presidents Trump and Xi reaching a comprehensive trade deal at the G20 meeting turned out to be off the mark, the two leaders did agree to a truce that will include new talks.
Additionally, America’s took its threatened, new tariffs off the table for now, and Trump decided to allow American tech companies to resume selling technology to a key Chinese tech firm, Huawei.
Moreover, Trump said the two sides are “back on track.” That indicates Xi agreed to reinstate the concessions that Beijing had, according to Washington, previously made, and then reneged on.
Since Treasury Secretary Steve Mnuchin indicated last week that the two sides had been “90%” of the way to a deal following China’s concessions, I remain convinced that the countries will reach a comprehensive trade agreement sooner rather than later.
In the wake of a trade deal, investors would become much less worried about a collapse of China’s economy. Consequently, Alibaba stock should rise.
But even if I’m wrong and a trade deal doesn’t get done soon, China’s recently unveiled economic stimulus appears to be strong enough to compensate for much of the impact of the trade war, at least for a while.
2. Digital Ad Spending Can Lift BABA stock
According to eMarketer, China’s digital ad spending is expected to climb 22% this year and 18.5% next year. In 2020, it’s expected to reach nearly $95 billion, and in 2023 it’s forecast to be worth $134 billion. Like its U.S. counterpart, Amazon.com (NASDAQ:AMZN), BABA is generating a great deal of ad revenue.
Alibaba’s digital ad revenue is expected to be $27 billion this year and $33 billion in 2020, eMarketer predicted. The latter figure is a significant 7% of the current market cap of BABA stock.
Alibaba’s ad revenue is likely to climb meaningfully in subsequent years as China’s digital ad sales continue to rise significantly. And interestingly, Alibaba’s digital ad revenue is expected to be more than three times higher than of AMZN this year.
3. Alibaba’s Domestic Investments
Those who are bearish on BABA stock often deride the company’s investments as wasteful and unprofitable. However, most of the company’s domestic investments clearly benefit its core ecommerce business.
BABA’s digital media investments also enable it to attract more users to its site and ecosystem through ads and attractive content. Likewise, its investments in logistics companies, digital payment companies, and lenders have made its ecosystem increasingly “sticky” and attractive for buyers and sellers.
Driven by its investments and acquisitions, as well as its powerful AI tools, BABA’s strong ecosystem will enable its core ecommerce business to keep growing rapidly and remain profitable as China’s middle class expands further.
4. Alibaba’s Foreign Investments
Alibaba subsidiary Lazada Group is reportedly Southeast Asia’s ecommerce leader and the region’s overall ecommerce sales are expected to climb to about $178 billion by 2025. That sounds like a tremendous profit opportunity for BABA and, consequently, a huge, potential catalyst for Alibaba stock.
India’s GDP is expected to grow more quickly than that of China this year, and the compound annual growth rate of the country’s ecommerce sales from 2013 to 2017 was a staggering 53%, although it’s expected to slow to a still-impressive 35% through 2022.
As Seeking Alpha columnist Skylar Florian pointed out, BABA’s strong ecosystem and multiple partnerships in India leave it very well-positioned to succeed in the huge, quickly growing economy.
Finally, Alibaba’s cloud revenue continues to grow by leaps and bounds, as the unit’s revenue jumped 76% year-over-year in BABA’s fourth quarter which ended in March. The company’s cloud business is also closing in on profitability, as its adjusted EBIDTA fell just 2% year-over-year last quarter.
As more and more Chinese companies join the cloud over the next few years, the business should become a meaningful profit center of the company and a significant driver of Alibaba stock.
As of this writing, the author owned shares of Weibo stock.
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