Amazon.com Inc. (AMZN, Financial) has market capitalization 2.3x larger than Alibaba (BABA, Financial) but actually earns less money, even with the Chinese yuan at its lowest level in 22 months.
For now, China is comfortable with a weak currency, but as its citizens become more affluent and moves toward a knowledge-based economy, the yuan will eventually rise against the dollar. At that point, it will be very easy to afford the country's $34 trillion pile of public and private debt, which many consider an explosive threat to the global economy.
If there was parity between the yuan and U.S. dollar, Alibaba's profit would dwarf Amazon's, and it would still have the most potential for organic growth because, despite the slower pace, the Chinese economy is still booking growth at close to 7% a quarter. That would be a good year in the U.S., or any other developed economy.
Alibaba expects to earn north of $6 per share in 2019 and mid-$7 per share in 2020. At the current price, that would place its stock at 20 times earnings. The question then becomes, "Will the company go out of business by 2040, or will it continue to grow?"
The company already accounts for 58.2% of retail e-commerce in China, which could point to continued prosperity, but it is definitely a target on its back. China's e-commerce sales will outpace the growth of Alibaba, but as the overall retail pie gets larger, Alibaba will still be in a dominant position.
Alibaba added 87 million active mobile shoppers last year, bringing the total to 580 million users. During that time, consumer spending only moderately increased. New users typically have a lower average basket price than existing customers because they're usually new internet users, just getting their feet wet. Only after building trust and familiarity with Alibaba’s platforms do customers begin to spend on high-ticket items. Thus, over time, as long as the company can keep its users active, it will keep them buying more and more.
If it stays on trend, Alibaba will more than double its sales by 2022, tracking almost $20 billion in earnings. That has to be good for at least 50% gains in its total market value.
With Jack Ma on the way out, Alibaba has done a great job reinforcing the network effect through impressive user engagement numbers. It has alleviated concerns about trade wars and other potential macroeconomic issues, as well as given greater visibility regrading future investment priorities.
Over the last few years, Alibaba has pivoted from traditional e-commerce to big data, maybe in the mold of Amazon, but still very close in its value propositions. Transaction data from its marketplaces, financial services and logistics businesses allowed the company to move into cloud computing, media/entertainment and online-to-offline services. Now, with more than 870 million active users across all of its platforms, Alibaba is able to test new products and services with ease.
And, don't forget that Alibaba’s China retail marketplaces generated gross merchandise volume of 4.5 trillion yuan (roughly $680 billion) during 2017, which was more than Amazon and eBay combined. Based on data from iResearch, that represented more than 75% of China's total online shopping segment.
The bottom line
People in China will continue to gain wealth, affording them the ability to buy an ever increasing amount of goods and services. Alibaba will remain in that top-of-mind category just like Amazon is here in the U.S.
With big bets in artificial intelligence and business computing, Alibaba may very well double sales again from 2022 to 2030. Along the way, whether China's currency strengthens against the dollar or not, Alibaba's market capitalization is going to reach $1 trillion.
Disclosure: I am not long/short any stock mentioned.
