After a recent rebound, Ali Baba (NYSE:BABA) is down almost 20% from its 52-week highs. It’s much better than S&P 500, which is down about 27% from its highs. Given all the circumstances at the time, it is difficult to determine whether Alibaba’s stock outperforms or underperforms expectations.
While Alibaba easily outperforms the S&P 500, it lags behind what many would consider its peers. For example, JD.com (NASDAQ:JD) is down only 6.5% from its peaks, while Amazon (NASDAQ:AMZN) is down 11.3%.
So while there are advantages with Alibaba’s performance, there are also questions.
China is booming
Before entering Alibaba, you have to say something about the big picture here. The company operates from China, which all investors are likely aware of at this point. With a population of 1.38 billion, it has the largest population of any country in the world. The Chinese middle class is booming and growing at a staggering rate.
For illustration purposes, see these two graphs. The first shows the size of the Chinese middle class. In 2002, that figure was only 80 million. This year it should be 700 million people. This represents an increase of almost 900% in less than two decades, and more than double the total population of the United States.
The second graph below shows that in 2010, only 5% of the Chinese population was considered to belong to the middle class. This year, this figure should stand at 48%, highlighting how much wealth has been created in the country.
These are the people who are driving growth in China. The middle class is fueling consumption, online orders and GDP growth in China. As the world’s second largest economy and the most populous country, China is expected to experience steady and strong growth over a long period.
COVID-19 will certainly drive back the Chinese economy. But it will be done all over the world – it is not as if China will be distinguished in the midst of this unpleasant epidemic. Over time, however, China and the world will recover.
A deeper dive on Alibaba Stock
Due to China’s centuries-old wealth growth, consumer games are an obvious choice. That’s why we love JD.com so much too. But not only is Alibaba a much larger game in commerce than JD, but it is also more diverse.
In 2019, 66% of Alibaba’s revenues came from Chinese trade revenues. This is down, in particular compared to 79% in 2016, even if Alibaba saw a drastic increase in total trade revenues in China (+ 100% from 2017 to 2019). The reason why its share of revenue has declined, despite the increase in sales, is due to the fact that other growth segments represent a larger share of the pie.
For example, cloud computing revenues almost quadrupled from 2017 to 2019, now constituting Alibaba’s largest non-commercial revenue stream. Digital entertainment, the second-largest non-commerce revenue generator, climbed 63% from 2017 to 2019.
The diversity is great, but the reality is that Alibaba generates most of its income from trade, for which it has a dominant position in China. Its Tmall platform represented more than 61% of the total gross value of goods (GMV) market share in the fourth quarter of 2018. Although purchases may suffer in the short term, online purchases are a story of growth long-term secular.
COVID-19 is bad for everyone, but in the end, consumers always have to buy things. They don’t leave their homes to do it, which leaves e-commerce – and Alibaba – there to answer the call.
BABA in numbers
Over the past four quarters, Alibaba has generated net revenue of $ 24.7 billion on sales of $ 70.6 billion. A profit of $ 9.48 per share values the Alibaba share at approximately 19.6 times the profit. This is quite a good price for a company with several secular growth engines (cloud, commerce, etc.) moving in a country with a growing middle class.
A reasonable assessment of unreasonably solid growth is simply too good to be abandoned. The Alibaba share is a buy on the downside, especially since it continues to outperform the wider market amid the coronavirus epidemic.
Matthew McCall left Wall Street to really help investors – bringing them into the world’s biggest and most revolutionary trends BEFORE anyone. The power to be “first” gave Matt’s readers the chance to earn + 2,438% in Stamps.com (STMP), + 1,523% in Ulta Beauty (ULTA) and + 1,044% in Tesla (TSLA) , to name a few. Click here to see what Matt has in his sleeve now. Matt is not directly the owner of the above titles.