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It’s the equivalent of Amazon in China and a great way to play the boom in e-commerce and cloud computing
Wednesday 23 Dec 2020 Author: Steven Frazer

China offers huge growth potential in 2021 and beyond and Alibaba (BABA:NYSE) is arguably the best way to play this theme.

The country’s answer to Amazon, Alibaba owns the largest online marketplaces in China while Alibaba Cloud is the region’s leading cloud platform. The company went public six years ago, and its share price has since risen nearly 300%.

Ambitious plans, which include doubling the active users of its digital ecosystem to 2 billion by 2036, are being driven by savvy digital vertical investments into areas like smart logistics, payment services, cloud computing, online marketing services, travel booking, music and video streaming.

Where Amazon subsidises its online marketplace with its very profitable cloud business AWS, the opposite is true of Alibaba. Its top Chinese marketplaces, Taobao and Tmall, do not take on any inventories. Instead, they act as paid listing platforms that link buyers to sellers, with its logistics unit Cainiao fulfilling orders.

This less capital-intensive approach keeps Alibaba’s core commerce business very profitable and allows it to fund its currently unprofitable cloud, digital media, and entertainment and innovation initiatives units.

Competition in China’s cloud computing space is tough, but Alibaba already has an estimated 50% market share, which should make its journey to similar profit margins to Amazon’s 30%-odd a big lever for future growth.

In short, Alibaba is valued at less than half of Amazon despite producing substantially wider margins, greater profitability on a group basis, and having a more extensive sales growth outlook for the next couple of years.

In the six months to 30 September 2020, Alibaba’s revenue grew 32% year-on-year and its adjusted earnings rose 28%. Analysts expect Alibaba’s revenue and earnings to increase 38% and 32% this year respectively as its growth is forecast to improve in the second-half period.

It is important to note that Alibaba faces growing online competition in China from the likes of JD.com and Pinduoduo.

Alibaba’s shares recently wobbled when the stock market listing of its part-owned Ant Group was temporarily halted by Chinese regulators as they looked to implement tougher rules on fintech firms.

There are also US threats to delist Chinese firms from Wall Street as part of a compliance clampdown, however these look largely political.

Investors need to be comfortable with these risks to buy the shares.

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