The Jack Ma era of Alibaba (NYSE:BABA) is slowly coming to an end. On July 13, the company’s annual filing showed that the founder of the company sold $9.6 billion of his Alibaba stock in the past year, cutting his ownership stake by 160 basis points to 4.8%.
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If you own Alibaba stock, Ma’s shrinking influence on the company, both literally and figuratively, shouldn’t bother you. Ma’s been reducing his exposure to Alibaba for several years now.
If you’ve owned BABA for a while, you shouldn’t change course just because the founder is diversifying his investments. Alibaba remains an excellent investment. For those who don’t own its stock, but are considering it, the company is in the capable hands of chief executive officer Daniel Zhang, who at the age of 48, remains in the prime of his business career.
In the last article I wrote about the company in early June, I said that should the markets as a whole do well, Alibaba stock should test $300 by the end of the year. A little over a month later, despite the revelation of Ma’s reduced ownership stake, Alibaba remains in an excellent position to test $300.
Here are three reasons why.
Ant Financial IPO
Reuters revealed July 8 that the Ant Group, the holding company for Alipay, the Chinese online payments platform, is seeking an IPO listing later this year on the Hong Kong Stock Exchange. It could have a valuation upwards of $200 billion. This matters because Alibaba owns 33% of Ant Group.
The company is looking to sell between 5-10% of its stock to investors, making it one of the biggest IPOs in 2020. In 2019, Ant had sales of $17.1 billion and $2.4 billion in profits. If the $200-billion valuation is accurate, Ant will be selling its shares at almost 12 times sales and 83 times earnings.
InvestorPlace contributor Matt McCall recently wondered if this piece of news made Alibaba stock a buy.
“Obviously the potential IPO won’t happen overnight, but it should be viewed as a positive catalyst for Alibaba,” McCall wrote on July 10.
“For me, Alibaba’s stake in Ant has been one of the reasons I’m bullish on BABA. Thankfully though, there are other reasons to consider a long position too.”
I couldn’t agree more.
Assuming a 20% annual growth rate for Ant Group revenues over the next five years, a multiple of 12 times sales and a 14% net margin, Alibaba’s 33% interest could be worth $169 billion or 25% of its current market cap.
The Ant Group IPO is a big deal.
Alibaba Helps Asian Retail Stay Afloat
Bloomberg published an article on July 15 that discussed how Alibaba helped Asian retailers set up online shops to survive the pandemic. Lazada, for example, helped more than 30 retailers in the posh Marina Square Shopping Mall in Singapore to set up an e-commerce version of the mall itself.
“It’s a new concept in Singapore,” James Chang, the head of Lazada Singapore said in an interview. “From a shopping mall’s perspective, it could be seen as competition, but we worked out this partnership because it provides visibility and awareness of the tenants and offline mall.”
Lazada started Lazmall in 2018. Since then, it’s grown to six Asian countries with more than 18,000 brands on the site. Thanks to Covid-19, Lazada’s business has taken off.
Alibaba first invested $1 billion in Lazada in 2016. In 2018, it invested an additional $2 billion to increase its stake from 51% to 83%. In total, Alibaba’s invested $4 billion to date in the Southeast Asian company.
With Southeast Asia’s internet economy expected to grow to $200 billion annually by 2025, Alibaba’s investment is likely to pay off in spades.
Alibaba and Alibaba Stock Fundamentally Sound
In my June article about Alibaba, I argued that there were few if any, Chinese stocks with the fundamentals to match it.
“As U.S.-listed Chinese stocks go, Alibaba remains the creme de la creme. It’s the gold star of Chinese investments. With or without Covid-19, its future potential remains bright,” I wrote.
“… If I could only own one Chinese company, it would likely be Alibaba.”
InvestorPlace’s Louis Navellier also feels quite confident about Alibaba’s future. He recently discussed that Alibaba deservedly gets a premium because of its strong fundamentals.
“Fundamentally, Alibaba is in terrific shape. Needham analyst Vincent Yu certainly seems to concur with this outlook as he has established a price target of $275 on BABA stock,” Navellier wrote July 10.
“Yu furthermore assigned a rating of ‘buy’ on the stock. The analyst cited Alibaba’s ‘well-established ecosystem, strategic position in the e-commerce value chain and deep understanding of China’s retail environment.’”
Just because Jack Ma is carrying out planned sales, does not mean he’s lost confidence in Daniel Zhang and the rest of the Alibaba management team. One could argue precisely the opposite.
Alibaba remains a strong buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.