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Why Investors Underestimate Alibaba

Alibaba (NYSE: BABA) is the biggest e-commerce player in China, so comparisons between it and Amazon (NASDAQ: AMZN) are inevitable. But with Amazon's $1.5 trillion market cap nearly double Alibaba's $790 billion, does Alibaba have the potential to be as big as its American rival?

In fact, Alibaba possesses a number of unique strengths. These strengths give Alibaba plenty of room to grow even after an excellent financial performance this year amid the COVID-19 pandemic. Let's look at why Alibaba is poised to become even bigger.

Image source: Getty Images.

China's economy

The biggest factor in Alibaba's favor is the macroeconomic forces around it. The U.S. reign as the world's top economy is threatened -- and by some measures, has already ended. On a a PPP (purchasing power parity) basis, China already has the highest GDP (gross domestic product) in the world.

As for nominal GDP, the U.S. is clearly still on top, but most analysts expect China to take the crown in the next 10 to 15 years. The current trends support this projection. As of October, the International Monetary Fund estimated that China's GDP will increase 1.9% this year, in contrast to a 4.3% decline for the U.S.

A key driver of China's growth is the rise of its middle class. Today, over half of the world's middle class resides in the Asia-Pacific region, compared to just 17% in the Americas. The Brookings Institution estimates that more than 20% of the global middle class is in China alone. By 2027, China's middle class will comprise more than 1 billion people: a quarter of the global total.

China's middle class is already the largest in the world. This powers the Chinese government's new "dual circulation" strategy. This refers to China's continued focus on global trade (its historic center of economic activity) while it also works to increase economic reliance on businesses at home. Alibaba will be one of the beneficiaries of this new policy.

Alibaba's strengths

These factors only add to Alibaba's current success. Despite the global pandemic, the company has experienced strong growth this year. Revenue grew 34% year over year in the fiscal first quarter ended June 30, up from the prior quarter's 22% revenue growth.

The pandemic and resulting increase in user adoption of digital channels created opportunities for Alibaba. Due to the pandemic's global supply chain disruption, international wholesalers turned to to buy products, resulting in a year-over-year increase of more than 100% in daily active buyers in June.

E-commerce isn't Alibaba's only success story. Similar to Amazon, Alibaba operates a cloud services business. Q1 revenue jumped 59% year over year in this division. The company also operates brick-and-mortar locations.

Alibaba plans to announce results for the quarter ended Sept. 30 on Nov. 5. Given its success so far this year, it's likely that this next earnings report will continue the recent trend of excellent growth.

The company's own strong performance is complemented by its stake in Ant Group, which was working toward an IPO until it was abruptly suspended by the Chinese government over regulatory concerns. Ant is a financial services company established by Alibaba founder Jack Ma and is one of the largest fintech companies in the world. Alibaba owns about a third of Ant.

The bottom line

Alibaba's continued growth amid a pandemic shows its resilience. Between China's increasing global economic dominance and its own financial performance, Alibaba has plenty of revenue upside ahead.

The company is well-positioned to capitalize on the country's expanding middle class as well. Alibaba had 874 million mobile monthly active users at the end of its first fiscal quarter: an increase of 28 million from the previous quarter. This growth puts it on track to reach its target of 1 billion users.

These numbers are impressive. It's only a matter of time before investors realize just how much upside Alibaba still possesses.

10 stocks we like better than Alibaba Group Holding Ltd.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Robert Izquierdo owns shares of Alibaba Group Holding Ltd. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. and Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.


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