Alibaba Investment Thesis

Alibaba Group Holding (NYSE:BABA) is one of China’s most profitable companies. It reached new heights with a market capitalization north of $600 billion. But a Chinese government crackdown and trade war with the U.S. has investors revisiting their Alibaba investment thesis.

The company is the Amazon of China and one of the largest e-commerce retailers in the world. Like Amazon.com, Inc. (NASDAQ:AMZN), it’s also deeply invested in a range of technologies like cloud computing and artificial intelligence. And it’s an investment capital firm that has its ear to the ground on innovative new companies.

Alibaba is also well positioned to take advantage of China’s Singles’ Day, which is the biggest shopping day of the year. BABA is involved in entertainment, financial technology, supply chain solutions, and much more.

Let’s breakdown what it is that investors like about Alibaba Group and its founder Jack Ma.

Alibaba Market Share Is Dominant

The biggest reason Alibaba can stand against Amazon is because it operates in a different market and sells to different customers. Amazon is a consumer retailer, but Alibaba sells wholesale to businesses. This leaves little overlap in customer base or geography.

Amazon’s biggest market is the U.S., where it holds 39 percent of e-commerce sales. But Alibaba has 55.9 percent of China’s e-commerce market, and it doesn’t have as many fees as Prime’s membership program.

China’s ecommerce market isn’t small though – it’s estimated to be a $3.34 trillion market by 2023, and the company has a $600+ billion market capitalization on the New York Stock Market alone.

But focusing on ecommerce for either of these companies would be only seeing the tip of the iceberg. Both also have technology, finance, and other investments. Alipay, the company’s Amazon Pay-like fintech solution, has over 700 million annual active users.

Alibaba’s biggest revenue streams are actually in the core commerce business, digital media, entertainment, and financing innovation with Antshares.

In fact, Alibaba has such a large presence in the country that Beijing’s government is cracking down on it and founder Jack Ma. The billionaire is heavily outspoken against the Chinese Communist Party (CCP), and he poked the beehive in the form of the State Administration for Market Regulation (SAMR).

The government’s antitrust probe also coincided with a short disappearance of Ma. Investors (especially American) cooled on the stock through 2021 after the December 2020 announcement. 

Does Alibaba Stock Have A Moat?

Although the company is facing antitrust concerns, it does have several considerable moats to keep generating revenues and investor interest, especially as the pandemic continues.

In fact, Alibaba arguably has the deepest moat and longest runway of any company in the world. A moat can be viewed in various ways. Walmart (WMT) has cost advantages. Facebook (FB) has network effects. Coca Cola (KO) has brand advantages. All are difficult to emulate easily. For Alibaba, it enjoys a combination of all three across various parts of its business lines.

The company shouldn’t be compared to Amazon so much as JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD), along with Tencent Holdings (OTCMKTS:TCEHY). These companies more directly compete in e-commerce, and the company’s algorithms tend to reward products exclusively listed on its marketplace.

And it’s selling for around 25 times earnings, compared to Amazon trading at 70 times earnings. Even JD trades at 33 times earnings, showing how much multiple elevation is potentially left in this stock.

On the entertainment end, Alibaba’s 2018 deal to stream Disney’s animated library in China also gives it a solid foothold in the country’s streaming market.

Shareholders shouldn’t be too concerned with an antitrust action taken against the company, as they would still hold shares in the split companies if that occurred.

Is Alibaba Growing Revenues?

The company’s 2020 results showed revenue of $33.8 billion quarterly revenue for the fourth quarter. It served 779 million customers for the year. This gave the company $15.8 billion in net cash and $14.7 billion in GAAP-adjusted free cash flow.

Its adjusted net income of $11.9 billion is impressive for any company during the pandemic holiday season. By comparison, Amazon doubled year-over-year to $7.2 billion income in the fourth quarter of 2020.

That direct comparison alone is enough to make the bull case that Alibaba should be larger than Amazon. It could theoretically triple in size over the next five years, while Amazon will be lucky to maintain a foothold over $2 trillion. However, Amazon is growing at a fast clip itself so the like-for-like comparison cannot be made so easily.

Growing revenues across the board gives Alibaba investors hope that the split companies could still work in tangent and grow all their values.

But the question remains by just how much the company grew and how much growth potential is left with the government cracking down on it.

What Rate Are Alibaba Earnings Growing?

The growth rate at Alibaba remained in the high double digits across the board in 2020. Fourth quarter revenue increased 37 percent year over year, while growing net income by 56 percent.

Meanwhile, it largely kept expenses flat through the pandemic. It’s worth noting that digital media, entertainment, and innovation initiatives were a much smaller portion of the company’s revenue streams in 2020.

It’s unclear how fast this growth trajectory will continue when the economy eventually recovers. Of course, we don’t know when that will be. We’re already past a full year of social distancing with no real end in sight, despite a vaccine.

China dealt with it even longer, and management needs to steer through more turbulence ahead.

Alibaba Management Quality

Although he founded the company, Jack Ma predated Jeff Bezos by serving as the Executive Chairman instead.

Daniel Zhang took the helm in 2015, who steered the company through further growth opportunities even in Ma’s absence.

Zhang was included in Time Magazine’s Most Influential People of 2020 and with good reason – he transformed Singles Day into the world’s highest-volume shopping day.

He improved upon the house Jack build and kept supply chains running in spite of global lockdowns. On top of this, he used the company’s artificial intelligence solutions to help hospitals handle the COVID-19 diagnosis.

This positioned the company and its shareholders to prosper throughout the year until China’s antitrust ramblings stunted its meteoric growth. These headwinds can’t be ignored, as they’re coming from one of the most powerful governments on the planet.

Headwinds Facing Alibaba

The biggest obstacle slowing Alibaba down is the pending antitrust action. This is a problem facing the global tech industry, and even American tech giants like Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), and Nvidia (NVDA) face similar issues.

Tech stocks soared in 2020, but they’re struggled to escape orbit since then. The momentum of the economic recovery is pulling all these high-profile stocks from their historic highs, and it could be another year or two before they reach above them again.

However, this doesn’t necessarily mean you should avoid investing. Antitrust action could help investors in the long run by giving them shares in more companies that have growth potential.

Nevertheless, American investors should be particularly mindful of the possible effects of being a foreign investor if such action does occur. Of course, that risk also applies to American technology stocks, and Alibaba still has more potential multiple expansion than does its archrival Amazon.

Alibaba Investment Thesis Conclusion

Investors seeking a way to diversify their portfolio internationally often eye China. And Chinese technology stocks, like American technology giants, are facing a stale market in 2021 due to rumblings of potential antitrust action by their respective governments.

For investors with a long-term perspective, this provides a potential buying opportunity at a steep discount.

Share prices in Alibaba are notably lower from their all-time highs, and that means value investors have an opportunity to step in at a potential discount and be patient. However, it’s going to be a rocky road to that point, and there are likely to be a lot of ups and downs as the government probes continue.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.