There are many reasons to love the Chinese e-commerce darling Alibaba Group (NYSE: BABA). The stock has captured the imagination of investors around the world from its IPO in September 2014 to today. But the question is, does this behemoth still make sense as an investment?
I, for one, firmly believe that the company has tremendous upside potential. Here are seven reasons to love BABA right now.
1. The Chinese Economy
A barrage of negative press has caused many investors to sour on the Chinese economy. Talk of slowdowns and the possible implosion of the Chinese economy have dominated the discussion on Chinese investment in recent years. While it's true that the massive economic expansion has settled down, the growth story remains as exciting as ever. Pay no attention to the naysayers!
The Chinese economy began its expansion in 1978 after the government shifted to a market-based economy from a struggling, centrally-planned one. Since this time, China has averaged GDP increases of around 10% annually. That growth cements China's claim to the fastest sustained development of any major economy ever. Since the 2008 financial crisis, the nation has quickly becomes the largest contributor to global fiscal growth.
Despite its hyper-growth, China remains classified a developing country, as its per capita income is still meager compared to developed countries. But economic explosion has helped energize over 800 million citizens out of dire poverty into to the new global middle class.
These citizens transitioning to the middle class and entering the online world will help power Alibaba's growth far into the future.
2. Fiscal 2017 Fourth-Quarter Numbers
Investors were aghast when Alibaba failed to hit analyst's adjusted earnings per share estimates of $0.65 by a mere two pennies. The stock plunged over 5% when the news hit the wire on May 18.
But what the market initially failed to see was that the company reported an impressive 60% year-over-year revenue growth and a 38% expansion in non-GAAP net income during the same quarter. This news wasn't missed for long, as savvy investors quickly sent the stock price to a sharp recovery on the same day of the 5% plunge, leading BABA to close the day in the green.
3. Cash Flow
Cash is the lifeblood of every company and Alibaba boasts a significant amount. The Chinese internet giant posted nearly $12 billion in non-GAAP net operating cash flow in fiscal 2017. This is an amazing figure no matter how you break it down.
Most bullishly, this number has been steadily increasing over the last four years. Starting at a relatively modest $2.5 billion in fiscal 2013, cash has been trending sharply up to reach nearly $12 billion in 2017.
Unlike most U.S.-based companies, Alibaba has a very long-term vision. The company's stated goal is to survive a minimum of 102 years, so that it will have existed in three different centuries.
While the company has made numerous acquisitions in pursuit of this goal, I am most excited about the buyout of Weibo (Nasdaq: WB). This Twitter-like Chinese company hits all three of Alibaba's acquisition goals.
The company owns nearly 68 million shares of Weibo worth around $5 billion, marking a 31.5% ownership stake.
Weibo crushed first-quarter 2017 estimates, with revenue of just over $199 million on a $187 million consensus forecast.
CEO Gaofei Wang stated, "Our relentless focus to build the best social media experience in China is reflected in Weibo's strong performance in the first quarter of 2017, with revenues growing 67% year over year, or 76% on a constant currency basis, adjusted (earnings before taxes and interest) margin reaching 35% and (monthly active users) reaching 340 million."
Weibo, and what will likely continue to be a host of effective Alibaba acquisitions, will continue to keep the company on top for years to come.
5. Expansion To The Cloud
Alibaba is in the process of morphing from an e-commerce giant to a leading name in cloud data. JP Morgan analyst Alex Yao explained, "We believe Alibaba's core commerce is expanding from traffic monetization to data monetization and such trend will quickly expand to its media/cloud businesses."
Alibaba's cloud data service, called Aliyun in the United States, is angling to threaten Amazon's dominance in the space.
6. Jack Ma
CEO Jack Ma is a real visionary leader with goals of global dominance. I have tremendous respect for him, his story, and infectious enthusiasm for the company.
He firmly believes that Alibaba will generate enough revenue by 2035 to make it the world's fifth-largest economy. His leadership ability combined with his lofty vision is a potent force for corporate growth.
7. Price Momentum
Shares have been upward-trending since January 2016. The trend creates a classic buy opportunity for long-term, momentum-following traders.
Risks To Consider: Chinese companies are inherently risky due to sometimes questionable accounting and reporting practices. Always use stops and position size properly when investing.
Action To Take: Enter long position on an upside break of $147.00 per share. Our target price is $200.00 and initial stops are suggested at $134.93 per share.
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