Alibaba Group Holding Ltd. (BABA, Financial) delivered 53% returns in the last year. Recently however, the stock declined from $110 on Sept. 22, 2016 to $86.8 on Dec. 22, 2016. With strong quarterly results for the third quarter, the stock is back to $102. I believe the positive momentum is likely to sustain in the medium to long term. Alibaba is worth considering at current levels due to several upside triggers.
Alibaba reported 45% revenue growth for total core commerce in third-quarter 2016 as compared to third-quarter 2015. Growth in the China retail commerce segment on a year-over-year basis was 42% and growth in international retail commerce was 288% for the same period. This is significant because Chinese e-commerce growth remains robust and there is still market penetration potential. In addition, growth in the international segment is stellar. While growth is magnified in the international segment due to low revenue base, I see strong momentum sustaining in the long term. This will ensure the revenue and EPS trajectory for Alibaba remains healthy.
Another key game changer for Alibaba in the long term is cloud computing. The company’s paying customers doubled from the year-ago quarter to 765,000. As a result, revenue for the quarter swelled by 115% to 1.8 billion yuan ($261.7 million) as compared to 0.8 billion yuan for third-quarter 2015. The segment's EBITDA margin also improved drastically from negative 41% in third-quarter 2015 to negative 5% in third-quarter 2016. With cloud computing remaining a top priority for Alibaba, I see strong numbers ahead in this segment.
Alibaba has been trying to grow inorganically in the online payment business, which is another area that holds immense long-term potential. Alibaba acquired a 40% stake in India’s online payment business, Paytm. With the push towards digital transactions in India, Paytm is likely to perform well in the coming years and the investment will deliver strong returns. The company’s 40% stake in Paytm was valued at $680 million and I expect valuations to swell as the company grows.
In addition, Moneygram (MGI, Financial) confirmed yesterday it has accepted a buyout offer from Alibaba affiliate Ant Financial. The deal is valued at $880 million. Once the deal is completed, MoneyGram's money transfer business will be connected with Ant Financial's global base of users. This will be another major step in cementing the company’s position in the online payments business.
From a fundamental perspective, Alibaba is well positioned in the medium to long term to pursue further inorganic growth. For the quarter ended Dec. 31, 2016, the company reported non-GAAP free cash flow of $4.9 billion. This figure provides some insight to the potential financial muscle Alibaba has for strong organic and inorganic growth.
In conclusion, Alibaba is targeting robust growth in the underpenetrated market in China. At the same time, the company is moving in the right direction to make its global presence stronger. The results have been positive thus far and I expect organic and inorganic growth to continue in the coming years. Focusing on technology such as cloud computing provides additional upside. Based on these factors, Alibaba is worth buying for the medium to long term at current levels.
Disclosure: No positions in the stock.
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