The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary:

I recently increased my position on Alibaba. This Chinese e-commerce industry leader’s rapid growth story is not going to end anytime soon.

China’s economy is slowing down but Chinese customers still bought more than $30 billion worth of goods in 24 hours during Alibaba’s Singles’ Day last November 11.

Alibaba’s annual/quarterly revenue is still growing. The trade war tension started by President Trump is not slowing down Alibaba.

Aside from its India expansion, Alibaba is also expanding fast in South East Asia. It’s subsidiary, Lazada remains the top e-commerce online store in South East Asia.

Alibaba is now the third-biggest vendor of smart home speakers. Smart home speakers can drive more repeat online purchases.

It is high time we invest more on Alibaba (BABA). The persistent increase in its annual/quarterly revenue and net profit is unlikely to change anytime soon. Jack Ma’s company still touts 58.2% market share in China’s online retail industry. The other e-commerce operators in China like JD.com and Pinduoduo are too far behind to catch-up.

Alibaba’s Q3 revenue of $12.4 billion was a +54% Year-over-Year improvement. If Q4 brings $13 billion in revenue, FY 2018’s total will be $47.94 billion. Alibaba’s FY 2017 revenue was $37.76 billion. Alibaba finishing this fiscal year with +26.99% year-over-year growth might help boost BABA’s price to above $180 by early next year. Showing a resilient growth rate performance is a good incentive for investors to add more to their BABA exposure. Let us never forget that unlike Amazon, Alibaba makes most of its revenue in Business-to-Business (B2B) e-commerce. The Business-to-Consumer focus of Amazon is why Alibaba enjoys much higher average net margins (4.03% vs. 19.33%).

The chart below illustrates that Alibaba generates more profit than Amazon does. In spite of this key advantage, BABA is valued with lower trailing and forward P/E ratios. BABA’s Price/Book ratio is also more than 3x less than AMZN’s.

(Source: MarketBeat)

China’s e-Commerce Industry Is Much Larger Than America’s

Amazon’s (AMZN) failure to penetrate China guaranteed longevity of Alibaba’s leadership. My fearless forecast is that Alibaba will continue to have enjoy more than 55% of China’s online shopping market for the next decade. China’s e-commerce industry is expected to grow to $1.8 trillion in 2022. In comparison, the U.S. online retail industry will only grow to $713 billion by 2022.

Consequently, China’s notably larger total addressable market convinced me that Alibaba has better growth prospect than Amazon. Amazon’s growth will decelerate faster than Alibaba’s. I am not saying that Alibaba can maintain its current 3-year average of 45.91% annual revenue growth rate for three more years. China’s e-commerce industry’s estimated growth rate until 2022 is only 8.5%. Alibaba’s next 3-year revenue growth rate will likely slow down to the low or mid-twenties. This is akin to Amazon’s current 3-year average growth rate of 25.96%.

China’s economic growth rate is slowing down. In spite of this, the impulsive online shopping behavior of Chinese citizens remains strong. They spent more than $30 billion on Alibaba’s November 11 Singles’ Day event. The $30.8 billion spent last week is almost 3x larger than the combined amount spent during America’s 2017 Black Friday and Cyber Monday events last year.

In another comparison, Amazon’s Prime Day one-day event last July only generated $4.19 billion in sales.

Two Other Sources of Growth

Alibaba is China-centric. Less than 11% of its annual revenue comes from outside China. However, its new aggressive expansion plan in India should change help change this situation. India’s 2018 online retail will generate around $22.14 billion in sales. However, India’s growth rate has a projected compound annual growth rate of 19.8%. This growth rate could even go higher.

India’s increasing number of smartphone users and growing average per capita income could mean that online retail sales might hit $100 billion five years from now. India’s fast-growing e-commerce industry is why Walmart (WMT) bought 77% control of Flipkart for $16 billion earlier this year. Losing the bidding for FlipKart resulted in Alibaba now willing to invest $5 to $6 billion in a joint venture with Reliance Retail. This will create an omni-channel approach on retail.

Reliance Retail operates brick & mortar stores that sell fuel, grocery, clothing, jewelries, toys, tech gadgets, and consumer electronics. Reliance Retail doubled its annual revenue to $10 billion in its latest fiscal year. I like it that Alibaba wants a piece of India’s offline retail industry too.

Another growth booster for Alibaba is South East Asia. Alibaba’s $4 billion investment in Lazada made it the e-commerce leader in a market of 200 million customers. Frost & Sullivan estimated that South East Asia’s e-commerce revenue last year was $20.5 billion. It predicted that this would grow to $65.5 billion by 2021.

In spite of the challenge posed by Shopee, Lazada remains far ahead in South East Asia’s online retailing. In my country, the Philippines, Lazada is no.1 with 68% share of the national e-commerce traffic. Lazada has 45% in Malaysia and 47% share in Thailand.

(Source: iPrice.ph)

Final Thoughts

Another potential growth booster for Alibaba’s core online retail business is its emergence as the third-ranked vendor of smart home speakers. Just like Amazon’s strategy of using Alexa home speakers to persuade people do more repeat online shopping, Alibaba can exploit its smart home speaker strategy.

Smart home speakers are also great channels where Alibaba can gather more personal information and behavior of its more than 600 million customers in China. Selling more smart home speakers can also boost Tencent’s streaming music business.

(Source: Canalys)

My buy rating for BABA is strongly backed by this stock’s very bullish one year market trend forecast from I Know First. More importantly, I Know First has a very high 0.77 predictability score for BABA. It has a long track record of correctly predicting one-year price movement of BABA.

This Bullish forecast was sent to I Know First Subscribers on November 15, 2018.

How to interpret this diagram.



