Why Alibaba Stock Remains a Generational e-Commerce Play

Alibaba Stock

Alibaba Firing on All Cylinders

You can blame it on the “China risk,” given the potential surfacing of a major trade war between the U.S. and China, but the fact that the Alibaba Group Holding Ltd (NYSE:BABA) stock price fell despite delivering another standout year is dumbfounding.

BABA stock is down 12.6% from its record $206.20 in January, but it is up 5.8% this year and 57% over the past year, outperforming the Nasdaq and the S&P 500.

There is nothing that has changed as far as my bullish thesis for Alibaba stock goes. In fact, after the release of the fiscal 2018 results, I’m even more bullish on Alibaba stock.

Alibaba is displaying superlative revenue growth, but investors appear to be disappointed with the current pressure on margins.

My argument is that, just like many growth stocks, Alibaba needs to spend money on strategic acquisitions and capital expenditure in order to power long-term revenues and earnings.

Alibaba is allocating massive capital to expand its reach, with the long-term goal of dominating everything it touches.

The market appears to be much too focused on margins and earnings acceleration at this point. I view the current stalling in BABA stock as an opportunity.

Chart courtesy of StockCharts.com

Growth Is Staggering for BABA Stock

Let’s take a look at fiscal 2018.

The staggering fact is that Alibaba grew its revenues by 58% year-over-year to $39.9 billion.

And there is much more to come, as the company is predicting revenue growth of 60% for fiscal 2019, which is well ahead of the consensus estimate of 39.9%.  (Source: “Alibaba Group Holding Limited (BABA),” Yahoo! Finance, last accessed May 4, 2018.)

For a company valued at around $461.0 billion, this kind of growth is simply impressive.

Just look at the table below of what Alibaba has done with revenues since fiscal 2013.

Fiscal Year Revenue ($ Billions)
2013 $5.5
2014 $8.6
2015 $12.3
2016 $15.9
2017 $23.5
2018 $39.9

The next chart shows Alibaba’s revenue growth figures from 2014 to 2018.

Fiscal Year Revenue Growth
2014 56.1%
2015 43.4%
2016 29.3%
2017 47.9%
2018 58.0%

The compound annual growth rate (CAGR) during this time frame was a staggering 48.6%, so the growth in fiscal 2018 was that much more impressive.

The striking thing from the report was that Alibaba managed to grow its core commerce revenues by 60% to $34.1 million.

The key gross merchandise volume (GMV) metric came in at $768.0 billion, up 28% year-over-year and exceeding the 22% growth in fiscal 2017.

Alibaba’s CEO Daniel Zhang suggested the company is aiming for a GMV of over $1.0 trillion by fiscal 2020.

And while it’s still not material at this time, relative to the commerce revenue stream, Alibaba saw its cloud computing revenues jump 101% to $2.1 billion in fiscal 2018.

In my view, the cloud business could be a massive contributor to revenues in the future, and it is currently underappreciated.

So, while margins are under some pressure at this time, Alibaba has grown its free cash flow in five straight years, which will enable the company to invest.

Fiscal Year Free Cash Flow ($ Billions)
2013 $2.1
2014 $3.8
2015 $5.6
2016 $7.2
2017 $9.3
2018 $15.8

Analyst Take

My view is to not let the potential trade war scare you away from Alibaba stock. There will be hurdles to overcome, but those with a longer-term perspective should consider adding BABA stock on weakness.

The strength behind the financial metrics and the fact that China will eventually see its middle class rise to 500 million supports my bullish thesis for Alibaba.