One might think it generally unwise to buy a stock that’s already doubled in the last year. And while Alibaba Group Holding Ltd (NYSE: BABA) could definitely be considered a momentum play, with shares up 96 percent in 2017, any investors interested in buying growth at a reasonable price should also consider the stock.
BABA was one of just seven stocks to be named one of U.S. News’ best stocks to buy for 2018. Here’s a quick look at what the company does (hint: it’s more than you think), and why it’s still a steal even after a remarkable 2018.
What, exactly, does Alibaba do? If you observe the stock market, you may have heard of Alibaba. It famously set the record as the largest initial public offering ever in 2014, as shares debuted on the New York Stock Exchange for $68 per share, raising $25 billion from the IPO.
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Sometimes referred to as the Amazon.com ( AMZN) of China, the Chinese e-commerce giant dominates online retail in Asia’s largest economy, which, if you had to pick, isn’t a bad country to dominate. With China’s growing middle class, 1.3 billion people and 6 to 7 percent annual GDP growth, China is on track to inevitably surpass the U.S. as the largest economy in the world sometime in the next decade or two.
Its e-commerce operations are already massive: BABA is a company that literally did $25 billion of sales on “Singles’ Day” — the equivalent of “Black Friday” or “Cyber Monday” shopping holidays in the U.S. — this past November.
The similarities to Amazon don’t stop there. Alibaba, like its American counterpart, also has an impressive cloud computing arm that’s helping to stimulate its already prodigal revenue growth and boost margins. Cloud computing revenue grew 99 percent in the third quarter, compared to the company’s overall 61 percent growth rate.
While its sales to the Chinese public account for the vast majority of its revenue, BABA is ambitiously expanding its business internationally as well, where revenue growth came in at 115 percent last quarter.
[Read: 5 of the Best Stocks to Buy for January.]
And Alibaba also owns a big chunk of a little company called Ant Financial. “Little” might be the wrong word, as it’s the world’s most valuable fintech company, and the largest mobile-online payments company on the globe. Recently valued at around $75 billion — more than The Charles Schwab Corp. ( SCHW) — it’s also growing rapidly, with profits nearly doubling in fiscal 2017. BABA is entitled to 37.5 percent of all pretax profits and roughly one-third of the company upon its IPO, which is said to be in the works.
Alibaba is also part owner, along with Tencent and Baidu ( BIDU), of Didi Chuxing, China’s largest ride-sharing company, valued at more than $50 billion.
Alibaba’s valuation. It’s hard to make a cogent argument that BABA stock isn’t a steal at these levels, particularly when you compare it to other megacap growth stocks like Facebook ( FB), Alphabet ( GOOG, GOOGL) and Amazon.
Alibaba shares trade for 28 times forward earnings, which is precisely what Facebook goes for and only marginally more than the 26.5 times forward multiple on GOOG shares. None of those companies are growing nearly as quickly as BABA, where revenue growth accelerated last quarter.
If you have the stomach to invest in growth stocks and ride out the volatility occasionally associated with owning them, BABA is a perfect pick for you, and its relative value compared to some of the top U.S. technology and growth stocks on Wall Street makes it well worth including on the annual “Best Stocks to Buy” list.
Things to be wary of. Like any stock, Alibaba isn’t flawless, and there are a few potential pitfalls investors should be aware of.
The first commonly cited risk to owning Alibaba stock is its lousy corporate governance. Founder and CEO Jack Ma and a circle of insiders control about 95 percent of the company’s voting shares — in buying BABA stock, you’ve really got no say in how the company’s run.
This raises the possibility of management doing as it pleases without shareholder approval, for better or worse.
The other issue? Some observers worry that BABA’s numbers are so incredible that they’re too good to be true. To be sure, the consequences for fudging the books would be catastrophically bad for shareholders, but with scrutiny from the likes of Yahoo and other major institutional investors, it seems unlikely that the e-commerce giant’s leadership would be so bold and reckless as to boost its numbers for short-term upside.
At the end of the day, these risks seem rather minor compared to Alibaba’s extraordinary growth potential in a variety of different businesses, attractive valuation and ambitious agenda. After all, Jack Ma has been an extraordinary shepherd of shareholder value so far, and he would go down in history as a better conman than Bernie Madoff if Alibaba’s numbers were fudged.
[See: 7 of the Best Tech Stocks to Buy for 2018.]
Whether you’re buying stocks to beat the market in 2018 or you have a longer-term perspective, Alibaba shares, at today’s prices, are well worth considering.
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Why Alibaba Group Holding Ltd (BABA) Is One of the Best Stocks to Buy for 2018 originally appeared on usnews.com
