Alibaba Group Holding Ltd (NYSE:BABA) has a great start to 2017; BABA stock has soared 22%. To suggest it could add another 40% upside, or 70% for the entire year may sound crazy to some. However, it is very possible for Alibaba stock. To understand why, you must look back to Amazon.com Inc (NASDAQ:AMZN) in 2015.
In 2014, AMZN fell nearly $100 to $300/share. Then in 2015, AMZN more than doubled to end the year at $675.
There are two reasons for Amazon.com’s turnaround:
First, Amazon.com’s profit soared, thereby quieting many of its naysayers. Second, Amazon.com began releasing financial data for Amazon Web Services, or AWS. Immediately after its first reported financials for AWS, I concluded the cloud services business was worth $85 billion, far more than the $50 billion that many of Wall Street’s most aggressive analysts had figured. Nowadays, with the continued display of rapid growth (displayed from BNLMarketAnalytics.com) and future promise, some figure AWS is worth $300 billion! Therein lies the reason for AMZN trading at $850/share.
All things considered, AMZN was not undervalued by any stretch of the imagination back in early 2015, nor is BABA stock at 25x forward earnings. However, it was valued with some degree of doubt, and with no consideration of the pure scale or appreciation of AWS.
Ironically, this perfectly explains why Alibaba stock has a very good shot to top $150 by the end of this year, or at least get very close.
Why BABA stock will reach $150
Before Alibaba Group Holding Ltd went public, it had already started to build an impressive venture capital-like portfolio of assets. After its IPO, that buying and investing only intensified, with Alibaba Group Holding Ltd spending 10s of billions of dollars on promising companies and technology all across the world in just about every industry. Like AWS with Amazon.com Inc, BABA stock owners have absolutely no appreciation for the return on these investments, nor does Alibaba stock reflect that portfolio’s worth.
Therein lies the reason that BABA stock will soar throughout the rest of 2017. Just like AWS unleashed value in AMZN, Alibaba Group Holding Ltd portfolio of investments and assets will unlock value in BABA stock.
It starts with the IPO of Alibaba’s Ant Financial, which is better referred to as “Alipay”. Not long ago CNBC figured that Ant Financial could fetch a $60 billion valuation in its IPO, about 22% of Alibaba Group Holding Ltd valuation. A $60 billion valuation would be well celebrated, but I believe it considerably underestimates the value of Alipay.
Alipay is very similar to PayPal Holdings Inc (NASDAQ:PYPL). One big difference is that PayPal piggybacks the transaction volume of the online yard-sale eBay, while Alipay does with with the world’s largest company by gross merchandise volume, Alibaba’s Web properties. PayPal has a near $55 billion valuation, less than 200 million active customers, and processed just 1.5 billion transactions in its last quarter.
Therefore, how could Ant Financial and PayPal support a near equal valuation when Alipay has 450 million active users, a connection to the fast-growing Alibaba, and handles more transactions in two weeks than PayPal does in an entire quarter?
The optics don’t make sense, and given that PayPal Holdings Inc is expected to grow 16% in each of the next two years and PYPL trades at just 21x forward earnings, we can’t very well say that PayPal is overvalued. Instead, the only logical conclusion is that Ant Financial at $60 billion is a deep discount. In retrospect, Ant Financial could support twice that valuation, at least $100 billion.
Much like Amazon.com Inc disclosure of AWS operating metrics, the IPO of Ant Financial acts as insight into Alibaba Group Holding Ltd ability to invest and grow in other areas beyond e-commerce. Alipay is a true testament to the diversification of Alibaba Group Holding Ltd, and upside of BABA stock. After the IPO, investors will start seeing Alibaba Group Holding Ltd and CEO Jack Ma like they do Amazon.com Inc and Jeff Bezos. Hence, the sky is the limit for BABA stock, not $150/share.
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