Alibaba Debuts Shares in Hong Kong: BABA Implications
China’s largest e-commerce player just executed an equity offering in one of the most chaotic cities in the world right now. Alibaba BABA just issued roughly $13 billion in stock and executable options on the Hong Kong exchange in a global offering. Individual investors were able to get in on the action and placed more than 40 times as many shares as they were initially offered, according to the WSJ article.
This demonstrates an enormous amount of confidence in China’s Amazon AMZN of the East. Alibaba is planning on using the funds to further build out its product offering beyond online shopping like cloud computing and digital media, following in Amazon’s footsteps.
The Business
Alibaba’s primary revenue driver is its domestic commerce retail, which makes up 64% of its income and grew at a sizable 40% in its latest September quarter earnings. International commerce only makes up 7% of the firm’s total revenue, but there is still an enormous amount of growth opportunity in the markets abroad.
Alibaba has been slowly building out its cloud computing, digital media, and entertainment product offerings as these capabilities have become in demand globally. Alibaba Cloud is growing fast with year-over-year increases in the high double-digits to triple-digit percentages since it went online in 2014. The segment is still not profitable, but like any growing business, it is gaining market share and international traction.
The recent trade war hasn’t appeared to have materially hampered business performance for the enterprise, and BABA continues to drive returns for investors. China’s economy is slowing down, and the trade war is a significant catalyst. The fact that Alibaba has still been able to return investors over 35% year-to-date illustrates the firm’s impervious growth. As you can see below, BABA has been able to outperform its American competitor, AMZN.
BABA vs. AMZN
Alibaba may be smaller than Amazon, but it is right on its coattails. China is expected to be the largest consumer market in the world by the end of this year, and Alibaba has secure domination of this market and a share that continues to expand.
BABA is also able to achieve much stronger margins than AMZN and is actually more profitable than America’s favorite shopping site. Alibaba is expected to grow its topline at a substantial premium to Amazon’s, and with its leaner operations, it will continue to gain on them.
Right now, BABA is trading at a considerable discount to AMZN. Below you can see the PEG ratio of each company, representing the comparable forward P/E valuation of each stock accounting for growth.
As long as China’s consumer market doesn’t fall apart, I have confidence that BABA will outperform AMZN in the years to come. A trade war resolution will prove to have a much larger upside to BABA.
Take Away
Alibaba is hot right now, and its latest oversubscribed debut on the Hong Kong exchange illustrates this. This stock has a lot of upside potential, with the looming trade war being the only hampering its surge. Investors are still nervous about the economic slowdown in China and are pricing BABA accordingly. Analysts are considering this stock to be high risk, but its resilience to the trade war thus far gives me confidence in its ability to continue expanding.
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