Bullish on Alibaba at Current Levels

Alibaba has been growing at a robust pace, and the company's strong cash position will allow strong organic and inorganic growth in the foreseeable future

Author's Avatar
Nov 24, 2015
Article's Main Image

From an all-time high of $120 on Nov. 10, 2014, Alibaba (BABA, Financial) slumped by 52% to $57.4 by Sept. 28. The stock has subsequently trended higher by 42% to current levels of $81.3 per share. The correction phase for Alibaba was over when the stock bottomed out at $57.4, and Alibaba is likely to continue trending higher in the coming quarters. This article discusses some of the key factors to be bullish on the stock from a near-term as well as long-term perspective.

On Nov. 12, Alibaba announced that the company clocked $14.3 billion in gross merchandise volume on Nov. 11, making the global shopping festival the largest shopping day in history. According to Daniel Zhang, chief executive officer of Alibaba Group, this day demonstrates the power of domestic China consumption and the Chinese consumer's strong demand for international products. It also showcases how Alibaba uses Big Data, Cloud computing and mobile innovations to create the best shopping experience for buyers and sellers.

I am in complete agreement with these points, and Alibaba has been able to provide a quality shopping experience through robust absorption of technology. Just as an example, AliCloud processed a total of 140,000 transactions per second at peak.

Importantly, consumption growth in China still has room to expand, and Alibaba is likely to benefit. In the near term, the company’s December quarter results should be robust, and the positive trend in the festive season is likely to help boost the gross merchandise volume.

Leaving aside the festive season-driven growth, it is important to mention that, for the quarter ended in September, the company’s China commerce retail segment and China commerce wholesale registered growth of 35% and 32% on a year-on-year basis. This is indicative of the high-growth trajectory in China’s ecommerce market even when the economy is sluggish. When GDP growth stabilizes and trends higher again, the online market is likely to witness further growth traction.

It is also important to mention that the company’s international retail and wholesale revenue constituted 8% of the total revenue for the quarter ended in September. I see that increasing in the coming years as Alibaba makes inroads into other markets globally. In particular, the company’s revenue share from India should increase meaningfully with India’s ecommerce market still at an early stage.

From a financial perspective, Alibaba is well positioned, and that point is underscored by the fact that Alibaba generated $2.14 billion in free cash flow for the quarter ended in September. With strong cash flows, Alibaba should remain aggressive from an inorganic growth perspective. It was reported last month that Alibaba is in a bid to acquire video platform Youku Tudou (YOKU, Financial) for a consideration of $4.3 billion. Alibaba will be expanding horizons, and that will provide avenues for revenue diversification from a geographical as well as from a business segment perspective. The company’s cash and equivalents of RMB105.7 billion as of September provide enough flexibility for inorganic growth and big ticket acquisitions.

Alibaba will continue to trend higher on back of robust earnings, continued GMV growth and inorganic growth. The stock is attractive at current levels considering a time horizon of three to five years.

Disclosure: No positions in the stock