Alibaba Group Holding Ltd (NYSE:BABA) has long been dubbed the Amazon.com, Inc. (NASDAQ:AMZN) of China, which itself sounds like a compelling bullish argument for Alibaba stock. Indeed, Alibaba’s current strategy could be dubbed the most recent proof point.
Amazon, which began as a virtual bookseller, recently announced plans to open physical bookstores. Alibaba has been touting a similar strategy — something it’s labeled “new retail.”
A quick glance at the stock chart suggests promise. Shares of Alibaba stock have gained from around $121 a year ago to just over $193 this week.
The fact that innovative online retailers who dented the sales of many brick-and-mortar businesses are now apparently regressing to the same model isn’t always framed favorably by commentators. That’s because, at first glance, it’s unexpected.
But, as the phrase “new retail” suggests, there’s more to it than meets the eye. Both companies are focused on blending online and physical shopping, using swathes of consumer data to do so.
On Tuesday, Alibaba announced the purchase of Pakistani e-commerce company Daraz, which also operates in Bangladesh, Myanmar, Sri Lanka and Nepal. New retail isn’t new without the online component.
The downside to investing in physical retail, of course, is the cost. One longstanding perk of internet companies has been the absence of the same overhead as a restaurant or retail chain. Thus, Alibaba’s top line has been expanding outstandingly, while its earnings have been relatively unimpressive.
Quarterly earnings estimates have been shrinking in recent months. Meanwhile, bottom-line estimates for the full year are higher than they were a full three months ago, but lower than they sat two months ago. Growth for the next five years is expected to come out to just 5% per year — a fraction of the supersized growth BABA posted in the last half-decade.
Revenue, on the other hand, is slated to grow by 53% this quarter and 47% next quarter, averaging out to 56% for the year, followed by another 40% pop. Those sales figures — especially alongside unpredictable earnings — also remind me of Amazon a few years ago.
When a stock with long-term promise — and the organic growth to prove it — faces short-term uncertainty from investors, it’s a great time to buy. Indeed, BABA stock offered a nice entry point below $175 recently, but has already bounced off that and is approaching a new all-time high.
Many companies can’t grow sales organically and rely on financial engineering to fuel profits. The opposite problem is a great one to have, particularly since it’s not because BABA doesn’t know how to monetize sales, but because it’s ramping up spending. The company’s expenses have more than tripled since 2015 and more than doubled since 2016.
If you believe those investments will pay off, as I do, the fact that BABA stock is currently trading for 30 times higher earnings seems pretty reasonable. Still, I’d wait for a dip — which will likely come when some quarterly bottom line comes in below Wall Street’s consensus — to make my move.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.
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