Why is everyone talking about Alibaba stock?

Gordon Best takes a closer look at Alibaba stock, and as the business splits into six units, whether it could now be at an attractive price.

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Despite being one of the largest e-commerce companies in the world, with a dominant market position in China and a growing international presence, Alibaba (NYSE:BABA) has been largely ignored by many investors. Owning Alibaba stock has admittedly been difficult in recent years. Increased geopolitical tensions, lockdowns, and threat of government intervention have led to a steady decline.

However, with exposure to the world’s largest market, incredible innovation, and strong fundamentals, I see a potential bargain.

Diverse revenue streams

Alibaba recently announced plans to restructure. This involves splitting into six distinct units, each of which may raise capital and IPO. These units are:

  • Cloud Intelligence
  • Taobao Tmall Commerce
  • Global Digital Commerce
  • Local Services
  • Cainiao Smart Logistics
  • Digital Media and Entertainment

The majority of income (68%) comes from Alibaba’s e-commerce platform. However, there is enormous growth potential in expanding capabilities in cloud and payment platforms.

Generating revenue from multiple areas is a key attribute I look for when investing in a company. With the ability to grow in several directions, stay agile, and leverage specialist skills across the business, I believe that Alibaba is better positioned than most.

Growing fundamentals

Fundamentals matter when it comes to companies within the technology and commercial sectors. Excitement in new products can lead to extremely high price-to-earnings (P/E) ratios. However, with a forecast P/E of 12.8 times for Alibaba stock, this really stands out when compared to 70.1 times for Amazon, and 76.4 times for Mercadolibre.

In the latest earnings report, Alibaba signalled an intention to add a further $15bn to a $25bn share buyback program. Adjusted profit increased 5% in the last year following a consistent track record of growth over the last few years. Both indicate a company with confidence in future execution, and the financial clout to put money to work within daily operations and also in the market.

Dominant market position

Chinese consumers heavily recognise and trust Alibaba’s brand. This has helped the company maintain its market leadership position. Alibaba is second only to Amazon in terms of global market share in the e-commerce space. With AI being rapidly implemented in the full suite of Alibaba products, and increasing global use of the platform, continued growth in e-commerce is likely to benefit Alibaba proportionally more than rivals with less agile business models.

Balancing risk

Investing in China undoubtedly requires a wider consideration than just Alibaba stock itself. The Chinese government has an enormous say in whether a company succeeds or fails. The 2020 suspension of an IPO for Ant Group, of which Alibaba owns 33%, was a clear example of this.

By owning stocks influenced by the Chinese government, investors need to be comfortable with risk. Although unlikely, there is still a chance that stocks may be heavily regulated, re-structured, or even delisted. My hope is that the recent re-structuring helps to dilute some of this fear.

What now?

I think the future of Alibaba stock is promising. Although there are a variety of factors which may concern investors, the fundamentals and quality of the company is fantastic. With the re-structuring likely to raise some excitement, I will continue to add to my position in Alibaba stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has positions in Alibaba Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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