Alibaba Group Holding Ltd (NYSE:BABA) World Trade Spurs Growth

Alibaba Group Holding Ltd (NYSE:BABA) World Trade Spurs Growth

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Alibaba Group Holding Ltd (NYSE:BABA) shares are currently trading in the $105–$107 range. The company has a market capitalization of $253.63 billion, and share prices have ranged from a low of $57.20 to a high of $109.76 over the past 52 weeks.

BABA is a Chinese e-commerce company that provides sales services via web portals, electronic payment services, and a shopping search engine. Its business model connects buyers to sellers rather than buying its own goods to sell, and instead of directly handling shipping services, it coordinates the shipping and delivery process. Retail margins are typically less than five percent, but thanks to this business model, Alibaba consistently records operating margins above 25 percent.

Alibaba Group Holding Ltd (NYSE:BABA) has some major investors in the company including Yahoo! and Softbank Group Corporation, and when combined with Alibaba management and employees, they own almost 60 percent of total shares.

Alibaba stock has almost doubled in the past year as traders see the company’s ability to improve upon mobile monetization. In the past quarter, its mobile monetization improved more than its desktop site.

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Analysts consistently have given Alibaba a buy rating in the $125–$130 range, citing the company’s recent impressive earnings. Revenues grew 59 percent year-over-year in the second quarter of 2016 to $4.83 billion, and investors were impressed by the 156 percent growth in cloud revenue. The company had 434 million annual active buyers in its China retail marketplaces in the 12-month period ending June 30, 2016, adding 11 million buyers in the second quarter alone and an 18 percent increase year-over-year.

The company introduced 319 cloud products during the second quarter, including advanced storage, big data, and security services. Analysts believe cloud products eventually could become a major revenue stream for Alibaba, as the company focuses not only on its core Chinese market but expands into Japan and South Korea.

Alibaba executives believe enterprise adoption of the cloud in China is about three years behind the United States, where approximately 10 percent of all executive workloads are in the cloud today. If even 20 percent of China’s estimated $200 billion of IT spending moves to cloud services over the next three to five years, that would mean a $30–$40 billion market in which Alibaba would be well-positioned to be the clear leader.

Alibaba management has targeted the 600,000 rural villages in China as an area for growth. The company currently has a physical presence in approximately 20,000 villages, and it is working to build out its distribution capability to bring more small villages into the fold.

Alibaba (NYSE:BABA) has always been a leading retailer of Chinese-made products to the internal market, but it is now focusing on bringing high-quality foreign imports to China, where customers have strong demand for these products. The level of disposable income in China is predicted to rise as the country shifts its economic emphasis from investment to consumption. One report predicts that by 2020, the size of affluent customers—with incomes over $16,000—will rise to 57 percent of the population. This bodes well for a boost in Alibaba stock.

Alibaba also is eyeing the expanding India market as part of its aggressive investment in Southeast Asia. Alibaba recently acquired Lazada, a privately owned e-commerce company in Singapore. This purchase gives Alibaba a presence in six new Southeast Asian markets, including Vietnam and the Philippines. Alibaba plans to improve Lazada’s logistical capabilities in order to boost growth, while at the same time expanding its AliExpress business, helping Chinese merchants sell their products overseas.

Another area for growth could be China’s expanding automobile market. Alibaba recently entered into a venture with Shanghai Automotive in which they jointly released an Internet-enabled car. This pioneering technology allows Alibaba to deliver broad Internet product offerings to passengers, such as paying for parking lots and gas stations through Alipay, intelligent maps, and smart voice control.

This does not mean there aren’t concerns about the stock’s valuation. The Securities and Exchange Commission recently launched an investigation into the company’s accounting practices. Alibaba also faces accusations that it doesn’t do enough to counter fake products found on its site.

Taking all this information into account, a Barron’s report found that a sum-of-the-parts valuation of Alibaba (NYSE:BABA) indicated a 30 percent upside in Alibaba stock. Its strong fundamentals and consistent operating margins make Alibaba a good long-term buy and something industry players will keep monitoring for quite a long time. For continuing coverage on BABA and our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!

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