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After Monumental Growth, Is Alibaba (BABA) Stock Still a Good Buy?

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Founded in 1999 by English teacher turned entrepreneur Jack Ma, Alibaba (BABA - Free Report) began as a China-based business-to-business marketplace and has since evolved into a multinational conglomerate. With humble beginnings and a constantly growing number of revenue streams, the firm has seen exponential growth in the 19 years since its founding, currently boasting a market cap of nearly $500 billion.

With this much momentum behind it, could the firm be as lucrative an investment today as it was in years prior? Let’s find out.

The Big Picture

Alibaba is headquartered in southern China and is an e-commerce goliath that currently focuses a majority of its operations on the domestic market. This Amazon (AMZN - Free Report) of China does not hold inventory or sell goods directly, but rather serves as a platform for third parties to do so. Besides e-commerce, Alibaba is also involved in technology development, cloud computing, logistics, digital entertainment, and other local services.

The company operates two retail shopping platforms: Taobao, which is now China’s largest e-commerce platform, and Tmall, which is solely dedicated to official brand stores and retailers. It also developed Alipay, a third-party online payment platform similar to Paypal (PYPL - Free Report) that accounts for roughly half of all payment transactions within China. Alongside these services, BABA also operates platforms in global retail, wholesale market transactions, and advertising. Alibaba boasts hundreds of millions of users across these platforms.

The firm has launched multiple initiatives around the world across each of its segments, making it an interesting company not only to follow but to potentially consider investing in as well. Let’s take a look at the numbers to get a better idea why.

By the Numbers

The firm is coming off a strong Q4 FY18 earnings report at the end of March, in which it posted earnings of $0.91 per share on revenues of $9.87 billion; both metrics surpassed the Zacks Consensus Estimate and increased 44.4% and 61%, respectively. Still, it is worth highlighting that BABA’s revenue numbers represent a 25.4% decrease from last quarter.

Alibaba currently reports earnings across four segments: Core Commerce (representing its retail business), Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives.

Revenue from its domestic retail business, which represents 65% of total revenues, grew 56% year-over-year to $6.4 billion. This was due largely to a 98 million annual active consumer boost to 552 million overall, along with a 110 million increase in mobile monthly active users (MAUs) to 617 million overall. Retail earnings from international ventures hit $903 million, also representing significant year-over-year growth.

Cloud computing was one of the main stars of the report, surging 103% year-over-year to $699 million. This was driven primarily by an increase in the number of paying customers as well as an increase in the usage of the firm’s more complex products, including content delivery network and database services. This will continue to grow as the firm expands its new ecosystem in Europe, the Middle East and Africa (EMEA) regions. Digital media and other initiatives also saw strong year-over-year growth on effective expansion measures.

Key Financials

Moving on to key metrics, investors should first take note of BABA’s 12-Month Forward P/E Ratio of 25.7x, which is about in line with the industry average of 23.6x, shown here:

Its ratio has historically been much higher than the industry average, but even so, the firm has consistently added value. By its own standards, the recent drop means that the stock is trading at a cheaper value than it typically does. While this may seem enticing, it is for a very important reason.

In the background of Alibaba’s stellar growth story are concerns of a potential trade war between the United States and China. In recent weeks, numerous tech stocks have taken a hit as the Trump administration has threatened to levy tariffs on the “Middle Kingdom.” This week, the

White House announced that it would impose $34 billion in tariffs on Chinese products starting at 12:01 am Eastern time on Friday. China responded by stating that it will also impose an equal amount of tariffs on the US.

In the last month, BABA stock has decreased over 12% from its 52-week high of nearly $212 to about $184. Should an extended trade war take place, it, along with many other firms would feel the burn, particularly if the Trump administration does follow through on its threat of restricting Chinese investment on US tech firms.

Still, Alibaba’s exposure to America is small enough that such a situation won’t hurt it significantly. The firm is strengthening its presence in other parts of the world, including Thailand, Korea, Indonesia, Hong Kong, Malaysia, Pakistan, and other nations in the region. Furthermore, it already holds a comfortable and ever-growing share of its domestic market.

But if we examine the firm’s margins, investors might see another cause for concern:

Over the past few years, the firm’s margins have been consistently trending downward. While BABA’s executive team mentioned this on a previous earnings call, stating that it would occur as the company continued to reinvest its cash into operations, including various expansion initiatives, current levels of about 58% are still quite healthy overall. This shows that even as BABA is spending cash, it is still earning it quite efficiently.

Looking at revenues, growth has been quite consistent:

The drop between December and March should not be a concern, since that is usually a slower period for BABA; there are no major events or holidays in China during that time. The overall trend is upward, indicating that the company is growing healthily and stably. This is important as it reflects the fact that its investments and growth initiatives are paying off.

Furthermore, taking a look at the firm’s cash, we see another bright light:

Alibaba is sitting on an ever-growing pile of cash, which it could potentially use for key acquisitions or further strategic investments. The firm did announce the acquisition of China-based delivery food start up Ele.me in April, which will be worth $9.5 billion after the transaction and already serves consumers across the country. It also acquired Pakistani e-commerce firm Daraz in May for an undisclosed amount, a move meant to expand the firm’s presence in South Asia. These moves will help the firm leverage its new retail and technological initiatives.

Finally, looking at EPS estimates, we see further evidence that BABA is on track for greener pastures:

While estimates for this fiscal year have been slightly trimmed from its highest point of $6.79 per share, it still represents an overall increase from those last year. In other words, concerns about BABA’s operations and a possible trade war are there, but so too is optimism that the firm can continue its trend of historical growth.

Outlook

Shares of Alibaba stock have grown nearly 30% in value in the last year, compared to an industry average of 26% during that same time. A strong earnings report and continued strategic investments and partnerships are all signs that investors should be happy to see. Still, a potential trade war looms in the near future, and there is no way of knowing just how far it can go.

In terms of Alibaba as an individual company, there is plenty of reason for optimism. However, more cautious investors may wish to first monitor the geopolitical situation between the US and China before deciding to act on any investment ideas involving the region. Furthermore, BABA faces risk politically as it must adhere to whatever policies the domestic government sets. It also faces heavy competition from fellow local tech giant Tencent (TCEHY - Free Report) across multiple sectors.

For investors with a higher risk tolerance, BABA could be an interesting venture that is trading at a comparative discount given its size and growth plans. However, it still may be more prudent to continue monitoring the firm and related news before making any decisions.

Alibaba currently sits at a Zacks Rank #3 (Hold).

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