Online retail has revolutionized the way we shop and, assisted by the expansive growth of the social media market, it is likely that in the near future, it will be impossible for any company to operate without an online presence.
While Amazon.com Inc. (AMZN, Financial)Â tops the global market value for listed e-commerce companies, Alibaba Group Holding Ltd. (BABA, Financial) tops the charts in Asia and has been growing its global presence through mergers, acquisitions and strategic partnerships with startups.
This M&A activity has led Alibaba to being likened to a venture capital company, with investors expecting it to gain substantially along with the expansion of its global footprint. As such, many would have expected the company’s market value to continue growing, even with the short-term headwinds that might come its way.
Shares of Chinese e-commerce giant, however, are down 15% since mid-March. The company’s stock topped $200 per share in January and again in March, but has now slumped to trade at about $170 per share.
The company’s stock rallied from about $60 per share in February 2016 to trade at $200 last month, but has since lost a significant portion of that gain following the recent pullback.
The massive rally that took place last year can be attributed to its impressive top-line growth. Alibaba added more than $7 billion to its 2016 revenue of $15.69 billion to top $22.99 billion in 2017. However, its global expansion affected its margins, leading to a significant decline in net income and diluted earnings per share.
The company’s bottom line fell from $11 billion in 2016 to $6.34 billion in 2017, while earnings per share declined from $4.33 to $2.47. As a result, we can infer that, given the company’s rally last year, the main driving force was its growing revenue.
This, however, does not downplay Alibaba’s ability to report a bottom line of $6.34 billion on revenue of $22.99 billion. This surpassed Amazon’s total net income for 2017 of $3 billion, showing how strong Alibaba’s profit margins are, especially considering the fact Amazon recorded revenue of $177 billion last year.
Alibaba’s recent plunge has been attributed to the new tariffs imposed by both the U.S. and Chinese governments. In what is being called a major trade war between the two countries, China imposed 25% tariffs on 106 American-made products less than 12 hours after the U.S. announced 1,333 Chinese products that would be taxed.Â
Currently, China imports $50 billion worth of goods from the U.S., which is almost nothing compared to its total annual imports of over $2.4 trillion. On the other hand, the U.S. imports more than $500 billion worth of goods from China, according to 2017 data.
While this will certainly affect Alibaba’s top line, it is unlikely it will correctly reflect the company’s recent decline in stock price. Alibaba has lost more than $77 billion in market value since mid-March, which is way too high to all be from the tariffs. Therefore, it would be correct to assume the current selloff might be significantly overblown.
In addition, when you look at Alibaba's 2018 revenue projections, there is no reason for investors to retract from their initial outlook on the company’s growth prospects. Alibaba will report its fiscal fourth-quarter and full-year 2018 results on May 4 for the period ended March 2018. Analyst estimates have a consensus revenue outlook of about $39 billion. This would reflect an increase of nearly $17 billion, or more than 70% growth, from 2017’s top line.
Considering the tariffs were introduced last month, most of the the potential effects to the company's top line have been baked into the stock price. As such, earnings may not impact the stock price much going forward.Â
With the expected revenue growth and the fact shareholders have invested in the stock based on its strong performance in the recent past, Alibaba could be an interesting opportunity for long-term investors.
Disclosure: I have no positions in stocks mentioned in this article.
