It's been a fun year to be an Alibaba Group (BABA 0.31%) investor.
The Chinese e-commerce titan's shares have surged more than 90% so far in 2017. Even better, the stock appears set for even larger gains in the years ahead.
Here are five reasons why.
Image source: Getty Images.
1. It's a strong play on China's economic growth
China's retail market is the largest in the world at more than $5 trillion. Alibaba dominates this massive market with an estimated 11% share, based on its $547 billion in gross merchandise volume (the amount of goods and services purchased on its platform, or GMV) in fiscal 2017.
Yet even at its current size, China's retail industry continues to grow rapidly; the country's total retail sales will exceed $7 trillion by 2020, according to research company eMarketer.
Moreover, Alibaba Executive Vice Chairman Joe Tsai noted during the company's first-quarter earnings call that e-commerce -- which comprises about 80% of Alibaba's revenue -- currently accounts for only 15% of China's overall retail sales. So it's probable that, as e-commerce continues to become a larger percentage of total retail sales, Alibaba's growth should significantly exceed that of even China's fast-growing economy. Alibaba apparently agrees; the company believes it can nearly double its GMV to $1 trillion by fiscal 2020.
2. It's also a solid play on U.S. e-commerce growth
In addition to China's torrid growth, Alibaba is also benefiting from the rise of e-commerce here in the United States. In fact, as my colleague Anders Bylund explains, you've likely already bought things via Alibaba's e-commerce infrastructure without knowing it when shopping on Amazon.com (AMZN +1.25%).
Many online shop owners source their products from Chinese manufacturers. And the great majority of these connections take place on Alibaba's platforms. Oftentimes, Amazon shop owners don't even need to take possession of the inventory. Instead, they can set up an arrangement in which the products are routed directly to Amazon's fulfillment centers, and Amazon handles the storage, packing, and shipping of orders. This is sometimes referred to as Alibaba-to-Amazon arbitrage, as shop owners are essentially trying to exploit the difference in prices between these two marketplaces. It's an effective strategy for many online merchants -- and one that's helping to boost the growth of both Alibaba and Amazon's third-party networks.
3. Growth is accelerating
With these powerful growth drivers fueling its expansion, Alibaba's growth is not only strong -- it's accelerating. The company's core commerce revenue soared 58% year over year in the first quarter, up from 47% in the fourth quarter.
Tsai attributed the company's success to Alibaba's long-term investment approach:
I wanted you to know that these exceptional results did not come from anything specific we did during the quarter. The reason we were able to deliver these results is that we sowed the seeds years ago by investing in technology, by investing in innovation, by investing in people and by being bold with a vision that nobody thought was possible. Today, the Alibaba economy is self-reinforcing and it is as strong as ever.
This level of foresight and patience in regards to its growth investments has served Alibaba well, and it should continue to bear fruit for shareholders in the coming years.
4. Shares are near their highs
Perhaps unsurprisingly, Alibaba's shares are trading near all-time highs. But rather than see this as something to be wary of, investors should view this as another sign that more good times are ahead.
Stocks tend to hit 52-week and all-time highs for a reason. It typically signals strong operational performance and exciting future growth opportunities -- both of which certainly applies to Alibaba.
Additionally, one of my core investment principles is that winners tend to keep on winning, and that past success is one of the best indicators of future success. Furthermore, during my Motley Fool analyst training we learned that there was one thing common among all of the best-performing stocks: they constantly hit new all-time highs. So I see Alibaba's strong stock price appreciation as a positive indicator of future success, rather than something to be feared.
5. Valuation is still attractive
Even after its incredible gains so far this year, I'd argue that Alibaba's stock is still a good deal. Shares can be had for less than 34 times analysts' estimates for fiscal 2018 (Alibaba's current fiscal year). With a 33% projected long-term EPS growth rate, Alibaba's price-to-earnings-to-growth, or PEG, ratio is currently near the 1.0 level that's considered to be bargain territory. Thus, investors who buy Alibaba's shares today should profit handsomely in the years ahead.
