After an almost 70% rise since the March lows of this year, at the current price of around $295 per share, we believe Alibaba’s stock (NYSE: BABA) has more to go. The Chinese leading e-commerce giant was growing fast going into the coronavirus crisis, and the lockdown has only made it stronger as more people adopt and increase amounts of online shopping and realize the importance of cloud computing. The internet retailer has seen its stock outperform through the coronavirus crisis, with a 40% increase year-to-date (compared to a 9% growth in the S&P). Alibaba’s stock is also about 62% higher than it was at the end of fiscal 2018 (year ending March), a little over 2 years ago. Our dashboard What Factors Drove 62% Growth In Alibaba Stock Between Fiscal 2018 (Ending March) And Now? explains more with underlying numbers.
Most of the 6% growth in Alibaba’s stock price between the FY 2018-2020 (FY ends in March) period was driven by the retailer’s impressive revenue growth of 80%. In addition, the company’s adjusted earnings per share (EPS) also grew by 43% during this period. Much of this growth was not valued in the stock, likely due to China’s economic instability and trade war uncertainty. To add to this, Alibaba’s adjusted net income margin contracted from 33.2% in FY 2018 to 26.0% in FY 2020, as it continued to expand its ecosystem, which includes the unprofitable cloud, digital media, and innovation units. Increased costs and more sales of lower-margin goods dropped the margins, which in turn, led to a decline in the P/E multiple from 35x to 26x during this period. Although the multiple currently stands at 40x levels, we expect it to grow further going forward on the back of Alibaba’s competitive advantages and the growth opportunities in China.
So What’s The Upside Trigger?
In the recent fiscal Q1, Alibaba’s revenue rose 34% year-over-year (y-o-y), driven by robust growth in its China commerce retail and cloud computing businesses. Its non-GAAP earnings rose 18% y-o-y. Alibaba’s core Chinese marketplace held annual active consumers of 742 million and mobile monthly active users of 874 million in June 2020, both more than 2x of the total U.S. population.
Alibaba will continue to generate most of its revenue from its core commerce and cloud computing businesses in the near to medium term. The company’s core e-commerce operations, which constitute around 86% of total revenues, have largely higher margins, notably lighter supporting infrastructure, and are less capital intensive. However, its smaller businesses which include digital media and innovation initiatives could be a bright spot in the long term as they still have a lot of room to grow. Alibaba also seems to be in a better position to tap the spending power of China’s burgeoning middle class, given that it is China’s biggest e-commerce business by gross merchandise value.
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