Why Alibaba Stock Jumped 14% Yesterday

Alibaba StockBABA Stock Jumps on Top-Line Growth

Shares of Alibaba Group Holding Ltd (NYSE:BABA) catapulted 14% after the company released jaw-dropping guidance on Wednesday, June 7. CFO Maggie Wu was the face of the announcement, which took place at Alibaba’s investor conference in Hangzhou, China.

Once you see the numbers, you’ll understand why investors were so enthusiastic.

Alibaba said it expects between 45% and 49% sales growth in 2018. This was nine to 13% above analysts’ estimates, which shows that Alibaba executives have high hopes for the coming year. (Source: “Financial Perspective and Guidance,” Alibaba Group Holding Ltd, June 8, 2017.)

No wonder BABA stock went nuts.

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Alibaba is the Chinese equivalent of Amazon.com, Inc. (NASDAQ:AMZN), a growth monster if ever I saw one. Amazon continues to push into new markets and dominate them, but China has remained beyond its grasp.

The Middle Kingdom belongs to Alibaba’s founder and CEO, Jack Ma. He is a full-fledged celebrity in the business community and has deep ties within China’s ruling party.

Now that he is trying to expand Alibaba’s influence to overseas markets, the firm’s top line has become a runaway train.

Ma expects this growth streak to continue. He wants Alibaba’s gross merchandise volume—a fancy way of saying “the total value of all sales on our website”—to reach $1.0 trillion by 2020. It is currently at $547.0 billion, so that is a steep climb.

Markets usually take such bullish estimates with a grain of salt, but look at what happened this week. Rather than falling short of analysts’ expectations, Alibaba outperformed them by a wide margin.

This suggests that we are too bearish on Alibaba stock, not too bullish.

What to Expect from Alibaba Stock in 2018

Why was the market so wrong about BABA stock? One explanation is that investors still view Alibaba as an e-commerce company, when in fact it is so much more.

Alibaba is a bona fide conglomerate. It has so many moving parts and business lines that putting a price on the stock is difficult. Seriously, its fingers are in everything from mobile payments to cloud computing—that’s one reason analysts misprice the stock.

I don’t care how sophisticated the model is, there is no way you can come up with a concrete target for this kind of company. All you can do is figure out whether or not the price will go up.

BABA_1year

Chart courtesy of StockCharts.com

From that perspective, BABA stock is a no-brainer. The share price is almost guaranteed to rise dramatically over the next few years, in part because China’s median wealth is skyrocketing.

The country has twice as many online users as the United States, which translates to twice as many shoppers, twice as many founders, twice as many everything.

You can see evidence of these trends in Alibaba’s forward guidance. The revenue increases that Wu predicted won’t fall from the sky. They will manifest from irrevocable shifts in the Chinese economy.

It is a serendipitous situation for any tech giant, although some of them would undoubtedly mismanage the expansion effort if they were in a similar position (I’m looking at you, Yahoo! Inc. (NASDAQ:YHOO)).

A skilled hand is needed to make the right investments, one with pure mastery of business models and macros. Regular CEOs, clever though they might be, would do better to funnel their profits back to shareholders. Dividends and share buybacks will do just fine for them.

But top-tier founder/CEOs should expand through investment. It yields enormous returns when properly executed. For instance, AMZN stock more than doubled in the last two years despite being classified as a “mega-cap stock.”

That’s because Jeff Bezos knows his business. Jack Ma and Alibaba are basically a mirror image, but in China. So why wouldn’t you be bullish on BABA stock, especially since it is underrated?