Back on April 6, I wrote about how Alibaba (NYSE:BABA) stock would be a winner in the Covid-19 era. In the three-plus months since that column was published, Alibaba stock is up over 20% and recently made new all-time highs.
It’s always scary buying a stock near all-time highs. However, I believe Alibaba stock has a number of long-term bullish catalysts. In addition, it’s valuation is much more attractive than that of its U.S. counterparts, potentially limiting its potential decline. Here are six reasons to buy Alibaba stock.
1. Alibaba Stock Is China’s E-Commerce Leader
As of mid-2019, Alibaba was by far the leading e-commerce market share leader in China. Alibaba holds a 55.9% share of total retail sales in China, according to Statista. Alibaba has roughly three times the market share of JD.com (NASDAQ:JD), which is a distant second with a 16.7% share.
To put that in perspective, Amazon (NASDAQ:AMZN) has only about a 44% share of the U.S. e-commerce market, according to Bank of America.
China is the world’s second-largest economy and is growing at a much faster pace than the U.S.. China also has more than four times the population of the U.S. If you are bullish on China’s e-commerce sector, Alibaba stock is the best play.
2. Live-Streaming
Within the e-commerce space, live streaming is an emerging marketing method.
“The live-streaming format offers consumers interactive shopping experiences, entertainment values that do not come with traditional shopping experiences, and access to exclusive discounts that are not available elsewhere,” Needham analyst Vincent Yu says.
Yu is bullish on live streaming as an e-commerce marketing tool and says Alibaba’s Taobao Live is the gold standard of e-commerce marketing in China. Taobao’s sales model involves live streamers promoting products and offering promotions and discounts to viewers. Viewers click on links provided by the streamers to purchase products from Alibaba’s Tmall or Taobao platforms. In return, the streamers receive commissions on their sales.
3. Local Delivery Services
Alibaba’s Ele.me delivery service is the second-largest delivery platform in China. Market leader Meituan Delivery is the top delivery service in China with 67% market share. However. Ele.me is a solid second at 32%, according to Needham. In other words, Alibaba is part of a delivery duopoly in China. Yu says Alibaba has been closing the market share gap with Meituan since the Covid-19 outbreak.
Ele.me is currently focused only on food delivery and has about 90 million monthly active users. Yu says Alibaba stock should benefit from the Alipay App driving its more than 700 million active users toward Ele.me over time.
4. Cloud Services
Alibaba’s AliCloud cloud services business is the clear market leader in China, with market share of about 46%. Amazon and Microsoft (NASDAQ:MSFT) have risen to more than $1.5 trillion market capitalizations due to the digital transformation of the U.S. economy. Alibaba stock is headed in the same direction, but China’s economy is growing a lot faster than the U.S. economy. Last quarter, Alibaba reported $1.72 billion of cloud revenue, up 58% from a year ago. That high-margin cloud revenue will continue to boost the company’s overall gross margins over the long-term. And you’d be hard pressed to find anyone who expects cloud services’ growth to slow anytime soon.
5. Ant Financial
Ant Financial is the company behind Alipay, one of the most popular mobile payment apps in China. In addition, the company has been growing its wealth management and lending business in recent years. Alibaba holds a 33% stake in Ant, which recently announced plans to go public in both Shanghai and Hong Kong.
At this point, the pricing of Ant’s initial public offering is unclear. However, analysts estimate the company could fetch a $210 billion valuation. That valuation suggests Alibaba’s stake is valued at about $70 billion. Even a conservative $150 billion valuation estimate represents a value of $19 per share for Alibaba.
6. Alibaba Stock Is Undervalued
It’s rare to find a stock near its all-time highs that is still undervalued. However, Alibaba stock might be an exception. The shares are valued at an enterprise multiple of just 24.5, making them attractive, especially compared to Amazon which has a 39.3 enterprise multiple. That valuation gap has widened in recent months as U.S. investors seem to realize how much Amazon’s business is benefiting from Covid-19.
“We think Alibaba’s market-leading position in the e-commerce segment, the new retail segment, and the cloud computing segment, which all benefited from the Covid-19 outbreak and the secular shift in consumer behavior post-Covid-19, should drive Alibaba’s multiple expansion following Amazon,” Yu says.
Based on a sum-of-the parts valuation, Needham has a “buy” rating and a $275 price target on Alibaba stock.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long GM.