Chinese e-commerce major Alibaba (BABA, Financial) has now beaten analyst expectations for two quarters in a row as revenues rose 54% during the third quarter and 60% during the fourth. The sudden increase in revenue growth numbers has pushed Alibaba stock up by more than 27% since the start of the year and has more than doubled since February of last year.
The one single factor that is behind the newfound momentum in Alibaba’s stock price is the acceleration of its growth rate. In fiscal 2016, Alibaba’s total sales reached 101.143 billion yuan ($14.7 billion), up from 76.204 billion yuan for 2015, growth of 32.72%. But sales soared in 2017 as Alibaba posted 158.273 billion yuan, growth of 56% compared to last year.
While Alibaba’s core e-commerce business grew by 45% during the year, noncore segments pushed Alibaba’s sales number to higher ground as cloud computing revenues increased by 121%, digital media and entertainment grew by 271% and revenues from innovation initiatives increased by 65%.
This rapid sales growth, in turn, sent the stock price from around $60 in early February 2016 to the current $120 levels. It is not unusual to see high valuation multiples when you have a company that looks set to double its revenue every two to three years. But at more than 13 times sales, Alibaba is currently trading in dangerous territory: At these levels, Alibaba will have to keep its sales numbers moving at a similar rapid clip for many more years to come.
Amazon (AMZN, Financial) is no slouch when it comes to the retail business, and it has a roaring Amazon Web Services unit as well. Despite its strong double-digit growth, international presence and its No. 1 position in the cloud computing segment, Amazon is trading at less than four times sales while Alibaba is trading at three times that level.
Let there be no doubt that Alibaba was at the right place at the right time. It has built a strong e-commerce business in China where Amazon is still struggling to get its act together. Its No. 1 position in the Chinese market makes it difficult for competitors to catch up, similar to how Amazon’s No. 1 position in the U.S. e-commerce market makes it harder for other companies to match.
But the problem here is not Alibaba and its business segments but its stock valuation. At more than 13 times earnings, investors will have to accept a roller coaster ride and low returns on their investments. Alibaba cannot keep growing at the current rates forever. Sooner or later, growth numbers will have to come down, bringing the valuation multiples down with them.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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