Alibaba Group Holding Ltd: BABA Stock Is Misunderstood

Big Opportunity with BABA StockBig Opportunity with BABA Stock

I smell an amazing opportunity in shares of Alibaba Group Holding Ltd (NYSE:BABA) after the price of BABA stock fell to $92.00 on Friday, from the $100.00 level when I previously reviewed it several weeks back.

The downward slide in BABA stock was slightly more than the options market was pricing in, which was around $6.00 per share in either direction.

But, instead of running away, I suggest you take a closer look at Alibaba Group Holding Ltd. The company’s just-reported fiscal second quarter was great, supporting my bull thesis.

Of course, there are concerns arising from the surprise win by President-elect Donald Trump, who has targeted China for unfair trade practices, so there is a sense of uncertainty. We also have the U.S. Securities and Exchange Commission (SEC) accounting probe into BABA stock.

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While the risk is obvious, I simply don’t see any cracks in my longer-term assessment of Alibaba stock.

Before we examine the BABA stock quarterly results, take a look at the staggering sales achieved by the company on the annual Singles’ Day (November 11). The one-day sales marathon is akin to Cyber Monday on this side of the Pacific. Yet, while Cyber Monday saw a record $3.07 billion in sales in 2015, Alibaba Group Holding Ltd delivered a mind-boggling $17.7 billion in sales on Singles’ Day this year.

A closer look showed that the over-400 million shoppers on Singles’ Day spent their initial billion dollars in less than five minutes, and over $5.0 billion in the first hour.

Traders dumped BABA stock on concerns that its Singles’ Day growth rate of 24% was below the staggering 60% recorded in 2015.  In my view, the decline is not a massive deal, as it is expected since the scale of sales rise, which is critical.

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Chart courtesy of StockCharts.com

Staggering Growth Is Exciting

Alibaba Group Holding Ltd recorded 439 million active users in the second quarter while the key mobile monthly active users (MAUs) was 450 million in September, which is up 23% sequentially from the first quarter. This is the kind of growth I like to see, as more users can mean increased spending.

In the second quarter, Alibaba Group Holding Ltd reported that its annual China commerce retail revenue per annual active buyer grew to $32.00 from $23.00 a year earlier. This may not seem to be at lot at first glance, but remember the scale of the user base: revenue growth at 55% year-over-year to $5.14 billion.

Consider the revenue breakdown:

  • Retail commerce +41% to $4.27 billion
  • Cloud computing +130% to $224.0 million
  • Digital media and entertainment +78% to $541.0 million

This is superlative growth for Alibaba Group Holding Ltd, which makes the price weakness in BABA stock another opportunity.

Yes, there are the Trump and SEC risks, but the reality is that Alibaba Group Holding Ltd has been able to grow so far by driving domestic Chinese spending, which has become a hallmark of Beijing.

I don’t see this changing, and it could only help Alibaba stock. There will be hiccups along the road, but there will also be opportunities.