Alibaba Group Holding Ltd (NYSE:BABA), the Chinese e-commerce giant, announced in a Securities and Exchange Commission (SEC) filing that it has become the world’s largest retailer measured by annual gross merchandise volume. (Source: “Form 6-K: Alibaba Group Holding Ltd – BABA,” Securities and Exchange Commission, April 5, 2016.) You would think that would mean good news for BABA stock, but it’s actually been quite the opposite. BABA stock is down about 17% since its initial public offering (IPO) about a year and a half ago.
Alibaba’s fundamentals are still great though. Revenue in the company’s latest quarter rose 32%, beating analyst estimates. So what gives? Alibaba is facing increased competition from Chinese e-commerce rivals such as JD.Com Inc(ADR) (NASDAQ:JD), and signs of a slowing Chinese economy aren’t helping either.
But there’s still a lot to like about BABA stock. Here are three catalysts that could give BABA stock a boost.
Most people forget, but Alibaba has its hands in China’s booming movie industry. Alibaba entered the movie industry in 2014 when it paid $804 million to acquire a majority stake in Chinavision Media Group, which was subsequently renamed as Alibaba Pictures Group Ltd (HKG:1060).
Alibaba’s movie company has become the largest Chinese film company by market value, worth about $10.0 billion as of mid-2015. (Source: “Is Jack Ma’s Alibaba Pictures Really Worth $10 Billion?” Forbes, June 7, 2015.)
And it’s no wonder that CEO Jack Ma is interested in the Chinese movie market. China has now become the second-largest film market, with a box office gross of $6.78 billion. That’s up 40% from $4.82 billion in 2015. (Source: “China Box Office Growth at 49% as Total Hits $6.78 Billion,” Variety, December 31, 2015.)
Alibaba has invested in Chinese productions and even a couple of Hollywood blockbusters. The company brought the latest Mission Impossible movie to China and it has also partnered with Lions Gate Entertainment Corp. (USA) (NYSE:LGF) to bring the The Hunger Games and Divergent movies to the country.
The growth of the Chinese box office over the next few years is set to take off and BABA stock is sure to benefit.
Growing Middle Class
If you’re looking for a play on China’s growing middle class, then BABA stock might be worth a look.
China’s middle class is set to explode over the next few decades as hundreds of millions will be joining the rank. According to economists Li-Gang Liu and Louis Lam, by 2030, China’s middle class will reach about 93% of the urban population. (Source: “China’s rising middle class will create opportunities the world has never seen before,” Business Insider, May 14, 2015.)
The economists also noted that the rise of China’s middle class will help lift consumption share in gross domestic product (GDP) to around 50% by 2030 from 36% in 2014. (Source: Ibid.)
So even though China’s economy may be slowing, the middle class is growing. And along with that comes more income and consumer spending, for which Alibaba is well positioned.
Alibaba announced a few weeks ago that it is diving into the virtual reality (VR) space with the launch of its own VR lab called the “GnomeMagic Lab.”
The company said that the first-ever project for the VR lab will be to develop a three-dimensional (3D) virtual warehouse with a view to integrate virtual reality into the shopping experience. Alibaba claims to already have completed 3D modeling for hundreds of products and will issue standards for merchants to create their own VR shopping option.
Alibaba also said that it is exploring other applications of VR, such as video with Youku Tudou and entertainment through Alibaba Pictures. Alibaba-backed Youku Tudou recently launched 360-degree panoramic videos.
“VR technology can create an immersive shopping experience for users,” said Alibaba engineer, Zhao Haiping in a press release. “Perhaps in the near future, users will be able to shop on Fifth Avenue in New York, while still sitting at home.” (Source: “Alibaba Looks Towards Virtual Reality To Enhance Shopping Experience,” IR.net, March 17, 2016.)
Like the U.S., China’s virtual reality market is about to experience explosive growth. According to research firm Analysys International Enfodesk, virtual reality sales will climb a whopping 372% this year to $136.46 million. The firm forecasts that next year, growth will also be in the triple-digits. (Source: “Virtual Reality to Drive Big Revenues in China,” eMarketer, February 16, 2016.)
Alibaba is already laying the groundwork to transform the shopping experience. As VR takes off in China over the next few years, expect BABA stock to follow suit.
The Bottom Line on BABA Stock
Alibaba is well positioned to take advantage of China’s booming box office, growing middle class, and exploding virtual reality market. Investors may want to take a look at BABA stock.