Alibaba May Be Too Attractive to Ignore
Alibaba Group Holding Ltd (NYSE:BABA) would likely trade at a much higher multiple if it was a U.S. company like Amazon.com, Inc. (NASDAQ:AMZN).
BABA stock trades at 23 times the 2017 earnings per share (EPS), representing a major discount to the 93 times ratio for Amazon. So should Alibaba Group Holding stock trade at $386.00 based on a multiple of 93 times? My initial thought is that BABA stock is not worth even close to 93 times.
The problem is that comparing the investment merits of companies is more than simply looking at the multiple. The reality is that Alibaba stock has the China risk, which encompasses the realization that the company is vulnerable to sudden changes in Chinese policy that could do damage to BABA stock.
Now, having said that, my view is that Alibaba stock is worth more than the current price of $95.70. How much more, I’m not sure but, even if you factor in a reasonable multiple of 30 times, you’d arrive at a share price of $124.00, up 29% from the current levels. Heck, why stop there? At 50 times, BABA stock would trade at just over $200.00. I think you get where I’m coming from.
Chart courtesy of StockCharts.com
The thing is, CEO Jack Ma and Alibaba Group Holding Ltd are for real. It’s not a fly-by-night Chinese speculative stock, but a rising power in the global e-commerce marketplace.
Jack Ma has massive ambitions to not only support Alibaba Group Holding’s dominant position in China, but he wants respect outside the Great Wall.
Alibaba Plays Up to Trump
Alibaba Group Holding has global ambitions, and that includes the lucrative U.S. market. Ma has already ridden up the gold-laced elevator at Trump Tower and met with President Trump, who he calls “smart” and “open-minded.” Trump said it was a “great meeting.” (Source: “Alibaba’s Ma meets Trump, promises to bring one million jobs to U.S.,” Reuters, January 10, 2017.)
The discussion didn’t revolve around whether Trump has ever tried General Tso’s chicken, despite his liking of KFC, but what Ma and Alibaba Group Holding can do for America.
Ma pledged to bring on one million U.S. small businesses online to the Alibaba e-commerce platforms to sell to Chinese consumers. Trump was giddy to hear this.
At the current World Economic Forum in Davos, Switzerland, Ma had a keynote speech on his views on globalization. Of course he was in favor of it and suggested that Alibaba Group Holding was focused on forming key global partnerships rather than making acquisitions.
For instance, the company’s rapidly growing and lucrative cloud business (which I think is underappreciated), just inked a potentially lucrative long-term partnership to provide cloud solutions to the International Olympic Committee (IOC) into 2028. (Source: “IOC and Alibaba Group Launch Historic Long-Term Partnership as Alibaba Becomes Worldwide Olympic Partner Through 2028,” International Olympic Committee, January 19, 2017.)
The deal makes a whole lot of sense for both Alibaba Group Holding and the IOC, as the next three Olympic games are slated for Korea, Japan, and China.
I view the IOC venture as opportunistic for BABA, stock and it’s deals like this that make me think that Jack Ma is on the right path to global significance.