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Alibaba Group Holding Ltd Remains a Winning Investment

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Once red-hot Chinese e-commerce stocks have cooled off some recently.

It all started with a swing and a miss from the biggest player in the group, Alibaba Group Holding Ltd (NYSE: BABA ), in its February earnings report. Alibaba reported robust revenue numbers that topped estimates across the board, while also substantially hiking its revenue guide. But investors didn't care. BABA stock dropped because the company missed earnings estimates on sharper-than-expected margin compression.

That revenue beat/earnings miss was followed up by a nearly identical revenue beat/earnings miss quarter from China's second biggest e-commerce player, JD.Com Inc(ADR) (NASDAQ: JD ). Just like BABA stock, JD stock dropped sharply on the earnings miss.

At first glance, a big drop for these stocks on earnings misses makes sense. After all, these are big multiple, big-growth stocks with lots priced in. Conventional wisdom says they need beat-and-raise quarters to head higher.

But does that make sense? For Alibaba and JD, not really. Here's why:

Invest in BABA Stock Now, Reap Rewards Later

The Amazon.com, Inc. (NASDAQ: AMZN ) playbook goes something like this: Invest a ton now, gain huge market share on razor-thin margins, secure market dominance, reel back investments, and then turn up profitability on what is presumably a huge revenue base.

That process has worked well for Amazon. This is a company that, not too long ago, many bears doubted could even be profitable. Now, operating profits are in excess of $4 billion per year. And that is expected to ramp dramatically over the next several years.

Considering Alibaba is the Amazon of China, it's no wonder that they are taking a page right out of the Amazon playbook. Alibaba is pumping money into long-term growth initiatives like expanding the geographic reach of its cloud and retail businesses and growing its offline retail presence. Those investments could provide potentially huge operational tailwinds for Alibaba stock over the next five to 10 years.

On the cloud front, Alibaba already operates the fastest-growing cloud business in the world. But growth there is still accelerating, partly thanks to big expansion plans in Europe and Southeast Asia.

On the digital retail front, Alibaba has already found tremendous success in Southeast Asia through Lazada. The company is looking to replicate on that success in other markets, like Australia, Europe, and even the U.S.

BABA Stock Looking at Larger Profits

On the offline retail front, Alibaba is starting to get serious about being the everything-commerce company in China. Alibaba started 2017 by acquiring department store chain Intime for $2.6 billion, and then ended 2017 by putting $2.9 billion into China's biggest grocer.

If the cloud and digital retail businesses gain serious traction in new international markets and Alibaba morphs into China's biggest offline retailer, then this company is easily looking at doubling or tripling revenues over the next five to 10 years.

Near-term margin compression seems like a necessary sacrifice for doubling or tripling revenues. At the end of the road, Alibaba will have a ton of market share in previously untapped markets and more top-line dollars. Therefore, when management does decide to turn on the profitability engine in the future, shareholders will be looking at much larger profits than today.

Bottom Line on BABA Stock

Near-term margin concerns will weigh on this stock in the foreseeable future. Just when Alibaba stock was starting to get over its own margin headwinds, JD reported similar margin troubles, so BABA stock will continue to be weighed down by that report.

But longer-term, these near-term margin concerns are a necessary sacrifice for robust revenue growth and (eventually) even more robust profit growth. Consequently, its all about time-frame when it comes to Alibaba stock.

If you need to be out in six months, this may not be the name to buy. But if you have six years, this is a must-own.

As of this writing, Luke Lango was long BABA, JD, and AMZN.

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The post Alibaba Group Holding Ltd Remains a Winning Investment appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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