Alibaba Group Holding Ltd Rolls the Dice
Dear reader, here’s something you won’t hear from most mainstream pundits: Alibaba Group Holding Ltd (NYSE:BABA) could soon topple the reigning king of cloud computing: Amazon.com, Inc. (NASDAQ:AMZN). I know this sounds extreme, but watch out for Alibaba stock (BABA stock) nonetheless.
Seriously folks, this company is big-time, and it’s trading on the cheap. “Amazon Web Services” may have been the runaway favorite over the last five years, having crushed nearly all of its opponents. But with time comes change, and I see greater fragmentation in the future of cloud computing.
Let me explain…
Companies like Alibaba, Microsoft Corporation (NASDAQ:MSFT), and International Business Machines Corp. (NYSE:IBM) are gaining market share. This doesn’t mean that Amazon’s growth is going to slow; it just means the pie is growing fast enough for every company to get fat. The king isn’t the only one eating well.
The math is undeniable, folks. Only 5%-10% of corporate workbooks have migrated to cloud-based services, which leaves about $1.2 trillion up for grabs. There is tremendous potential for multiple players, so Alibaba’s gain doesn’t have to equal Amazon’s loss. (Source: “Amazon and Microsoft Are Running One and Two in Two-Cloud Race,” Fortune, August 4, 2016.)
In case you’ve forgotten, Alibaba stock (BABA stock) has tripled the performance of both the S&P 500 and the NASDAQ Composite in the last year. This isn’t all that surprising when you consider that its 2014 initial public offering (IPO) was the largest ever on the New York Stock Exchange (NYSE).
Like I said earlier, this company is big-time. That being said, you may notice that markets have kept BABA stock at a significant discount to rivals. While Amazon’s share price is about 180 times earnings, BABA stock trades at a meager 49 times earnings.
For the life of me, I can’t figure out why there is such a sharp break between these two valuations.
Alibaba is challenging Amazon on every front, from online sales to artificial intelligence (AI). Alibaba even has a dynamic chief executive who can pilot BABA stock to extraordinary gains, much like CEO Jeff Bezos has done for Amazon.
I’m talking about Jack Ma, a guy who built a multi-billion-dollar company from the ground up. This guy navigated the bureaucratic minefield of Chinese politics to win a listing on the NYSE. Can you imagine how difficult that was? He runs an Internet company in a country that polices the Internet!
It is a miracle that Alibaba stock exists at all. Yet, despite these similarities, the market gives Amazon a Titanic-sized edge.
BABA Stock Poised for Major Growth
Just in case anyone doubts the seriousness of Alibaba’s ambition, remember that it has put $1.0 billion toward cloud computing. Alibaba is building data centers in Dubai, Germany, Japan, and Australia that will bring it into direct competition with foreign rivals. (Source: “Alibaba’s Cloud Services Are About to Get a Lot Bigger Outside China,” Fortune, November 21, 2016.)
Until now, “Alibaba Cloud” has thrived off of its domestic success. But the new data centers bring its overseas presence to an all-time high of eight data centers, eclipsing the six domestic ones which helped it dominate in China. These additions could bring Alibaba another $10.53 billion in annual revenue as early as 2020, and I think that’s a conservative estimate. It could be much more.
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To be honest, folks, I think the only reason that Alibaba stock (BABA stock) lags Amazon stock is because it is a Chinese company. Americans are used to having the winner’s podium all to ourselves, so it’s hard to admit that a foreign firm could be as smart and innovative as one of our own.
It’s emotion that makes us feel that way, but emotion isn’t going to make us any wealthier. The reality of capitalism is that we invest based on a company’s potential. Money should do the talking.
If BABA stock is underpriced (and it is), we should be bullish on it, because that’s how the professionals do it. Do you think billionaires like Jim Simons or David Einhorn would ever hesitate to invest because of emotion? I don’t think so. They rush in for the kill, and that’s what makes them wealthy.