BABA Stock: Getting Rich in the Digital Economy

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BABA Stock to Soar from the Rise of Emerging Asia

Today’s stock represents another of our favorite investment strategies—investing in stocks that stand to gain the most from the rise of China. As the country gains further economic strength and its rising middle class continues to spend more on electronics, technology stocks in such growing economies are one of the best ways to gain triple-digit returns over the coming years.

The case in point being Alibaba Group Holding Ltd (NYSE:BABA), which is a Chinese e-commerce giant. Alibaba is a platform that enables small enterprises to grow big by leveraging its technology. Alibaba’s vision is to be the future infrastructure of commerce and the company is betting big on the emerging retail model. Its businesses comprise of core commerce, cloud computing, digital media and entertainment, innovation initiatives, and others.

Alibaba stock has been riding high on the optimism surrounding its high growth businesses. Although other business segments hold immense potential, core commerce is the driving force of this Chinese juggernaut. The retail e-commerce business continues to grow strongly and transform the traditional retail space. For fiscal 2017, the revenue from core commerce comprised almost 85% of the total revenue and is set to grow further.

As per the recent eMarketer estimates for 2016-2021, worldwide retail e-commerce sales shall continue to post strong gains in 2017. It is expected to reach about $2.290 trillion, posting an increase of 23.2%. Moreover, for the first time, e-commerce sales will account for one-tenth of total retail sales globally. The report further says that the e-commerce sales growth will stay in the double digits throughout the forecast period. (Source: “Worldwide Retail and Ecommerce Sales: eMarketer’s Estimates for 2016-2021,” eMarketer, July 18, 2017)

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Alibaba stands to gain from these developments. There is high optimism surrounding the growth in the East Asian markets and the rise of digital economy furthers the prospects of the e-commerce giant. Alibaba stock is likely to go higher as it gets a boost from the massive surge in smartphone usage, digital financial payments, and the growing online shopping trend.

Alibaba dominates retail commerce in the world in terms of gross merchandise volume (GMV). The company’s Taobao marketplace is China’s largest mobile destination and its Tmall platform is China’s largest third-party platform for brands and retailers. AliExpress is its global retail marketplace with approximately 60 million annual active buyers from around the world, as of March 31, 2017, buying from manufacturers and distributors in China.

The management believes that China and other markets will be deeply impacted by the rise of “New Retail,” which shall replace e-commerce. In the new form of retail, there is no distinction between online and offline retail; in fact, they get integrated to provide customers with a new retail experience.

This is similar to what Amazon.com, Inc. (NASDAQ:AMZN) has been doing of late, and this is something that Alibaba is taking very seriously to continue posting impressive growth in the coming years. The Chinese e-commerce giant has been expanding its presence in traditional brick-and-mortar retailing in order to expand its new retail model.

A good example of this is the opening of its IKEA-like stores called Home Times that represent Alibaba’s vision of the furniture store of the future. A store opened this month in the Chinese city of Hangzhou, and a phone in hand is all that is required for a seamless shopping experience. This follows the successful expansion of the company’s Hema Supermarkets, which is an example of technology transforming traditional grocery stores. (Source: “Inside Home Times: Alibaba’s Vision Of The Furniture Store Of The Future,” Alizila, October 10, 2017.)

The company is taking all steps to emerge as the leader in the evolving new retail space. However, there are certain legal issues surrounding the company that refuse to go. That said, the company’s focus on being a preferred platform for international commerce shall continue to boost BABA stock.

Over the past few quarters, the company has been delivering great results, which has pushed Alibaba stock higher. Alibaba had a great first quarter and the results show that its technology investments for the past many years are bearing fruits.  

For the first quarter of fiscal 2018, the core commerce revenue grew 58% year-over-year, driven by new users, increased traffic and the effects of personalization. The annual active consumers on its China retail marketplaces reached 466 million, an increase of 12 million from that of last year. (Source: “Alibaba Group Announces June Quarter 2017 Results,” Alibaba Group Holding Ltd, August 17, 2017.)

BABA stock has been leaping from one record high to another as the secular growth story continues. The stock has gained by about 90% in the last five years and 75% in the last one year, as the following stock chart shows.

baba stock chart

Chart courtesy of StockCharts.com

Analyst Take:

Alibaba stock is an impressive play on the digital revolution. The retail sector is being changed by the introduction of voice, artificial intelligence, and machine learning, and Alibaba is well-positioned to capitalize on these changes. With its “New Retail” strategy, the company plans to leverage its consumer insight, mobile technologies, and proprietary in-store technologies to continue leading the space.

Apart from a great growth story like e-commerce, there are other business segments with great potential that BABA stock shall benefit from in the coming years. This is the China stock that investors could consider on every dip.