You might not have known that stocks go through fads too. Just like boyfriend jeans, stocks can be totally in one day, and losing most of their value soon after (as sadly indicated in the 3D printing disaster). The key question for you to consider when a stock joins the popular group (i.e. Facebook, Apple, Netflix) is; is it here to stay or just passing through?
Alibaba (BABA) is one stock that has been on everyone’s radar recently. While the stock dropped into the 80’s post-IPO, it has been up steadily over the past few weeks. The stock is up almost 10% from its close last Friday, trading at about $108 today.
Those of you who took my advice and bought in the mid-80’s are probably happy campers right now, sitting on over 25% profit in less than two months. But you might be wondering if you should book your gains and get out, or buy even more (that’s what I’m wondering at least). And those who haven’t bought any shares yet might be wondering if you’ve missed the boat and it’s too late to buy at all.
While the answer depends on your personal risk tolerance (those looking for low risk should stay away given the Chinese regulatory complications) and trading cash available, I’ll attempt to answer those questions with how I am planning to act.
Backing up for a minute, let’s discuss what Alibaba is. Alibaba is China’s biggest online commerce company. Reports say that 80% of China’s online shopping market is dominated by Alibaba. Alibaba is essentially a mixture of eBay and Amazon, with a little Google search engine thrown in. Alibaba makes most of its revenue from fees and commissions that it receives from the two large Internet marketplaces.
Alibaba started trading on the public markets (held an IPO) in September, which was the biggest IPO of all time with $250 million raised. Investors had been eagerly awaiting the IPO for quite some time, due to Alibaba’s strong revenue growth, high margins, and dominant presence in the Chinese market. The IPO was targeted at $68, but demand for the stock was so high that it closed at almost $94 on its IPO day.
So, why is the stock up so much this week? Alibaba reported its earnings on Tuesday and revenues were on fire. The company announced last quarter’s revenues increased a whopping 54% from the prior year. On top of that, they had 307 million annual active buyers on its retail marketplace. That’s about the population of the United States! Oh, and that number came about because of a gain of 105 million users.
The earnings figures Alibaba reported were not as clearly outstanding. Alibaba’s net profit for the period fell 39% from a year earlier to $494 million, about half of analyst estimates. However, Alibaba said much of this cost was due to share-based compensation, and so investors should look at the adjusted net profit instead. Adjusted net profit was up 15.5% from last year to $1.1 billion.
For me, the revenue growth is enough to alleviate my concerns over earnings. Alibaba still has great margins, and analysts expect them to head back up to the 50% range next year. When a company is growing this much, increased costs make sense from time to time as the company may need to make investments to support growth.
I expect revenue growth to continue too, given the rising middle class in China. Even with the major growth Alibaba has already made there, there’s still plenty of room for Alibaba to grow in China’s population of 1.4 billion people.
Just for comparison’s sake, Amazon (AMZN), seemingly the most common comparison to Alibaba, reported revenue growth of 20% when it reported earnings the other week. But it’s still making negative profits and its price to earnings ratio is about 5 times that of Alibaba’s. If you want the best bang for your buck when it comes to online retail growth, Alibaba may be your best bet.
So long story short, I’m not planning to sell now and I’m seriously considering buying more shares of the stock. The price seems to be hitting resistance around $110, so I am going to wait and see later this week if I can get it in the mid-low $100s. If I can’t get in that low and the stock exceeds its resistance point of $110, I’ll get in then.
For those risk averse, it’s worth remembering that owning a Chinese company can have its disadvantages. There’s always the chance that the Chinese government will decide to just take it for itself. I doubt that will happen, but it’s worth noting. For those of you who want to invest in a US based proxy for Alibaba, I’d consider an investment in Yahoo (YHOO). They own a big chunk of Alibaba, so they have tended to move together. And FYI, when I mentioned Yahoo as a potential Alibaba proxy back in July, it was trading at $33, and is now up to $47.