Alibaba: A Buy At Current Valuation? – Alibaba Group Holding Limited (NYSE:BABA)

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Alibaba’s (NYSE:BABA) stock growth in the year to date and especially after the latest earnings has had some investors questioning a long investment thesis in the company. The stock has jumped by close to 100% in 2017 in comparison to 9% growth in the S&P 500 and a 27% growth in Amazon (NASDAQ:AMZN). Before the latest earnings, I published a long thesis for the stock on 13th August when the price was $152. Since then the stock has increased by another 15%. We will look at how investors can still achieve good returns in this stock at the current price point.

A lot of attention has been paid to the core commerce and cloud computing segment of Alibaba. Both of them continue to show good growth rates. However, it must be noted that the management is strongly pursuing a strategy of hedging against an eventual slowdown in the main Chinese market as the law of large numbers comes into play. Alibaba is heavily investing in international markets and making new partnerships, which should deliver future growth momentum to the company.

In the recent quarter, the international retail e-commerce operation saw a growth of 136%. This increased the revenue to $389 million and contributed 6% to the overall revenue. A large part of this growth came from the Lazada deal made in April 2016. Lazada is a major e-commerce player in Southeast Asia. Alibaba has recently invested another $1 billion in Lazada, which has increased its stake from 51% to 83%.

Last year, a research report by Google and Temasek Holdings forecasted that the internet economy in Southeast Asia will grow to $200 billion by 2025. Alibaba is making sure that it has a strong grip over this market by making additional investments. Recently, it made a $1.1 billion investment in Indonesia’s Tokopedia, which should further accelerate its expansion in this region. It has a platform similar to Alibaba’s Taobao, which connects sellers and buyers directly.

Interestingly, Jack Ma has also been given the role of national e-commerce advisor by the Indonesian government. A close relationship with the government should give Alibaba the flexibility to expand at a vigorous pace without any regulatory bottlenecks. Although Amazon has also recently entered this market, it would be difficult for Amazon to invest substantially as it is already spending billions of dollars in building its base in the neighboring Indian market.

Besides Southeast Asia, Alibaba also has set its eye on Europe. Last year its first UK warehouse was opened in Dunstable. In January, it was revealed that Alibaba is looking to set a logistics center in Bulgaria to serve the Eastern European market. These operations might not start in the near future but by setting warehouses and building logistics, Alibaba can create deep inroads in these huge markets, which should provide a major growth engine.

Alibaba is also looking to corner a significant chunk of payments made by Chinese tourists traveling overseas. It has entered into partnership with Yelp (NYSE:YELP), which will allow Alipay users (over 500 million registered in China) to pay for restaurants when they use Yelp. Similar partnerships with foreign players will help in strengthening its moat and also gain a foothold in international regions.

Investor Takeaway

Alibaba’s international expansion will not happen overnight. It will take a couple of quarters before it makes a sizable contribution to the revenue. Although Alibaba’s main market will be China, current international expansion can increase revenue contribution of this segment to 20%-30% within a few years. This should provide a decent hedge against an eventual slowdown of Alibaba’s growth in China.

After the latest earnings, there has been an upward revision of consensus EPS estimate. For fiscal year ending in March 2019, the consensus EPS estimate is 5.46. At the current price, it is trading at 32 times this EPS forecast. At the same time, rival JD.com (NASDAQ:JD) is trading at over 140 times next year’s consensus EPS estimate of 29 cents. Another Chinese internet giant, Baidu (NASDAQ:BIDU), is trading at 33 times next year’s forecast.

Since its IPO, the lowest quarterly revenue growth shown by Alibaba was 27% in December 2015. This pushed the stock to the low 60s range. However, in the past four quarters, it has given over 40% growth, which has helped the stock maintain a continuous bullish momentum. If the international expansion continues at the current speed, boosted by investments and partnerships, we should see this momentum for the next few quarters. I think given the future growth potential, Alibaba can easily trade at 40-42 times next year’s earnings, which should push the stock to the $218-$229 range.

Although the current bull run in the stock makes Alibaba a bit pricey, long-term investors can still earn much better returns on this stock compared to other peers. High market share in international growth markets should also push the stock up as the risk associated with over-dependence on the Chinese market reduces. The stock remains a Buy at this price point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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