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Alibaba Group Holding Ltd.: Buy at the High?

By Anders Bylund – Jul 12, 2017 at 6:26AM

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The Chinese e-commerce titan's shares have gained 77% in 12 months and trade at all-time highs today. Is this hyper-growth stock still a good deal?

Shares of Alibaba Group (BABA -0.08%) are trading near all-time highs right now, setting new records on nearly a daily basis. The stock has gained a total of 65% so far in 2017, or 77% over the last year.

Is Alibaba's stock getting overheated at these levels, or would it still make sense to buy the stock right now?

Let's find out.

Alibaba logo.

Image source: Alibaba.

How does Alibaba work?

The China-based e-commerce giant has been in business since 1999, but joined the American stock markets as recently as 2014. It's the (AMZN -0.54%) of China, the eBay (EBAY -0.59%) of China, and whole lot more. Measured by roughly $550 billion in gross merchandise volume, this is already the largest retail business in the world: bigger than Amazon, bigger than eBay, bigger even than Wal-Mart (WMT -0.93%).

That being said, Alibaba's business model is a closer match to eBay than to Amazon or Wal-Mart. The company doesn't directly make or sell products, but acts as a middleman between buyers and sellers across China. That model is expanding beyond the borders of the Middle Kingdom, too. The next time you're buying a fidget spinner or an off-brand USB charger, chances are very good that Alibaba had a hand in that transaction. Yes, even if you bought it from Amazon or eBay -- those are our American gateways to the Alibaba universe via independent sellers in China and America.

Is the business still growing?

You bet it is.

In the recently reported fourth quarter of fiscal year 2017, Alibaba delivered 51% year-over-year revenue growth, an 83% increase in adjusted earnings per share, and 116% higher free cash flows. That sales growth is holding steady, quarter by quarter, but the profitability trends are accelerating.

In other words, this gigantic business is still growing like a hungry start-up. Alibaba is leaving American growth phenom Amazon in the dust. Yes, Alibaba is still growing.

And don't forget that the vast majority of this company's sales are generated right at home, in the Chinese market. The revenue contribution from international commerce stopped at just 10% in 2017, up from 8% in 2016. Expect the international business to pick up steam over the next few years -- Alibaba's management is currently "laying the foundation for long-term growth" in the international segment, according to the fourth-quarter report. There's a whole lot of untapped growth outside of China, and Alibaba is only getting started.

Red growth arrow drawn across a world map

Image source: Getty Images.

What's next?

This is not a cheap stock today. Alibaba shares are trading at 58 times adjusted earnings and 31 times free cash flows, and these valuation ratios have been rising relentlessly in 2017. If you're looking for a deep-discount value stock, Alibaba isn't your bag. Furthermore, the company doesn't pay a dividend, so this is where we say goodbye to single-minded income investors.

For pretty much anybody else, this is an exciting growth stock with acres of greenfield opportunity ahead of it, both in China and around the world. It might make sense to wait for a big share-price drop before building an Alibaba position in your portfolio, but you just can't say for sure that the stock price will be this low again. I mean, if you gave up on Amazon when it traded at record prices seven years ago, waiting on the sidelines for a plunge that never came would have lost you an 800% return.

As an Alibaba investor myself, I'm betting that the stock is a good deal even at today's sky-high prices. Sometimes you get what you pay for, and it looks like Alibaba will continue to crush the market for years to come.

Anders Bylund owns shares of Alibaba and Amazon. The Motley Fool owns shares of and recommends Amazon and eBay. The Motley Fool has a disclosure policy.

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