All Chinese stocks are trading at a discount on American exchanges, thanks in part to President Donald Trump’s delisting threats and anti-Chinese sentiment on Wall Street. Suggestions that Trump “cut off the supply” of American capital to China and “stop funding their nonsense” are giving Alibaba (NYSE:BABA) investors a big opportunity. But how big?
Consider that Alibaba is bringing 25% of revenue to its net income line and grew revenues 21% over its last two quarters. Slightly slower top-line growth is expected when it reports on Nov. 14 (note that Singles’ Day is Nov. 11).
Alibaba has $29 billion in cash, just half as much long-term debt, and sells for slightly over 7 times revenue. Facebook (NASDAQ:FB), with less growth but a stronger cash position, sells at 8 times revenue.
Discounted Cloud
Alibaba’s financial results are being discounted by the trade war. Its growth has slowed, down from 50% per year. China’s consumers are feeling a pinch. The fall of the yuan means its success is worth less when translated to U.S. currency.
Despite those headlines, the Alibaba stock investment thesis remains intact. Cloud computing revenue at Alibaba is growing at 66% per year. Unlike American cloud companies, including Microsoft (NASDAQ:MSFT), Alibaba is selling a complete suite of financial applications, not just a platform. In that way its cloud is more comparable to that of Salesforce (NASDAQ:CRM), which sells at 9 times revenue, and brings just 7% of that to the net income line.
Alibaba’s cloud is less mature than that of Amazon (NASDAQ:AMZN), which now gets over 11% of revenue from Amazon Web Services. The comparable figure for Alibaba’s cloud is 6.7%. Yet Alibaba’s cloud market share in the Asia-Pacific region now exceeds that of Amazon. That includes Japan and Southeast Asia. Alibaba has held this lead for two years.
After focusing on “new retail” for several years, buying malls and grocery stores, Alibaba is now refocusing on its cloud. CEO Daniel Zhang said last November cloud will be Alibaba’s “main business.” The company now hosts two data centers in Europe, and two in the U.S.
Market Dominance
While American politicians are promising to “break up” big tech companies like Amazon and Facebook, the Chinese government is cheering Alibaba’s dominance and intrusive technology.
Alibaba’s headquarters sports facial recognition door access, robot cars making deliveries and a hotel with automated guest check-in. None of this would be possible under American law because of privacy or antitrust concerns.
Alibaba can deliver its technology throughout the world’s second-largest economy through its network of retail stores. Its retailing lead over Amazon is immense. Its Alipay payment system, based on mobile phones, delivers revenue without the discounts charged by Visa (NASDAQ:V) and MasterCard (NYSE:MA).
In areas like artificial intelligence and robotics, China’s authoritarian policies give Alibaba an advantage. Alibaba can freely leverage its size advantages and technology prowess across the country. These systems can then be deployed to any economy whose government accepts them.
The Bottom Line on Alibaba Stock
Strip out the politics, strip out the rhetoric, and Alibaba is the most innovative company on the planet. Its government, and home market, are fully supportive of what it’s doing, and it is expanding rapidly in the fastest-growing markets on the planet.
It’s a core holding, period. It will be a core holding, and a key challenger to America’s “Cloud Czars,” throughout the next decade.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA, AMZN, AAPL and MSFT.
