Alibaba Group Holding Ltd: Triple-Threat Could Send BABA Stock Soaring

Alibaba GroupBABA Stock Could Surge…and Soon

Since Alibaba Group Holding Ltd (NASDAQ:BABA) had the biggest initial public offering (IPO) in history, the company’s share price hasn’t done so well. BABA stock actually fell 16.01% since it premiered on the stock exchange.

That being said, it’s not exactly a surprise. The Chinese stock market crashed last year and there’s been a general slowdown in China’s economy, so what were you expecting? Investors were bound to see it as a blow to Alibaba’s near-term outlook.

But that doesn’t mean they are right. The logic behind Alibaba’s downfall is paper-thin. Scratch the surface and you could find gold underneath.

After some in-dept research, I found three incredible reasons to be bullish on BABA stock:

AliCloud

Everyone knows that cloud computing is one of the most important trends on the market. It’s one of those buzzwords incessantly dropped at conferences and cocktail parties, but few people actually know how it works.

The “cloud” is a network of servers, or data centers, that house the collective data of the Internet.

The companies that own these servers, like Alphabet Inc and Amazon.com, Inc., lease out their storage space and computing power to other businesses. After all, they have to build these giant data centers for themselves anyways. So why not just build a few extra and make a ton of cash, right?

Alibaba has gotten into this game as well, and it is growing at a rapid pace. The company already has 500,000 customers on “AliCloud,” all of whom are paying for storage, security, or database management.

The potential size of this market is absolutely staggering. Morgan Stanley put a $39.0-billion valuation on AliCloud, saying it could be a significant driver of growth for the parent company. (Source: “Alibaba Cloud Hires Microsoft Veteran,” The Wall Street Journal, July 6, 2016.)

Alipay

Alibaba has long been at odds with China’s main banks, a fight that came to a head when the banks tried to sabotage Alibaba’s historic IPO (the biggest ever).

In March 2014, China limited the amount of money people could transfer to Alipay, a digital payments company owned by Alibaba. The move was meant to protect the banks’ interests, but BABA CEO Jack Ma did not take kindly to it.

In an interview soon after, he said, “If banks do not change, let’s change the banks.” Now one of those banks is a major investor in Alipay. (Source: “Chinese Tech Disrupters Now Are Working More Closely With the System,” The Wall Street Journal, July 7, 2016.)

Price-to-Earnings Multiple

What’s really strange is that Alibaba’s share price is only 18.82 times its earnings. Other Internet giants trade at multiples that stretch into the triple–digits. Why does the market keep Alibaba on a shorter leash?

I personally think it’s because the company chose to IPO at a modest price. Alibaba could have chosen a higher entry point to the stock market, but Jack Ma didn’t want to underperform expectations. Considering the relatively tame price-to-earnings ratio, I’d encourage investors to reconsider their argument against BABA stock.

So the Chinese economy slowed down a bit. I can understand taking a bite out of Alibaba’s share price if the stock was way above earnings—but it wasn’t. China is still growing at nearly seven percent, so what’s the big deal? I don’t see any silver bullet.

Like I said, the market has painted Alibaba stock a dark shade, but just a tiny scratch to the surface shows the gold that lies beneath.