Investing in China Through Alibaba (BABA)

It’s hard not to hear about China in the news these days. But it’s not only because of political news. China has become an economic powerhouse and has increasing social and financial clout in the modern world. Last year over 110 million Chinese people in China traveled as tourists. In comparison between 1949 to 1976 there were only about 700,000 travelers moving in and out of China. That is a huge change from just decades ago, which is not a long span of time in society. According to economists at HSBC, China is forecast to outpace the U.S. economy by 2030. “The projections suggest China’s gross domestic product will stand at US$26 trillion in 2030. The U.S. meanwhile will see its GDP rise more slowly to US$25.2 trillion from US$20.4 trillion.”

Let’s consider how roughly 1 in 5 living people are Chinese in the world today, and that China could become the world’s biggest economy in merely 11 years from now. One benefit of investing in large, blue-chip stocks in the U.S. is that a large share of the sales earned by S&P500 companies are from outside the U.S. This adds a level of diversification for domestic investors without having to hold separate investments in Europe or other parts of the world. However China seems to be a different story. The eastern country is one of the oldest in the world, and its citizens tend to live on an ideology that is very different from the traditions that make up much of the western world. Many American corporations have tried to expand into China but failed, including Amazon. Some consumers in China have complained that Amazon didn’t adapt well enough what Chinese people want. So this may lead investors in the U.S. to ask how Americans can invest in this country that is still growing relatively fast. Fortunately some major Chinese companies have publicly traded stocks on U.S. exchanges that Americans can buy with ease. One of those companies is Alibaba Group (BABA), a rival to Amazon.com.

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With a large market capitalization of $437 billion, Alibaba is widely known as the Amazon.com of China. However this company does a lot more than simply e-commerce. Alibaba also operates subsidiaries such as TaoBao, Alipay, TMall, Ant Financial, Alibaba Pictures, and other services. Those names may not be ubiquitous in the U.S., but they are popular within China. In the company’s latest financial report, its revenue grew 51% to $13.9 billion, and saw a 50% increase in adjusted earnings per share. The total merchandise volume sold on its platforms grew 19% year over year to $853 billion. Similar to Amazon, Alibaba also has a cloud computing service, which grew 76% in revenue to $1.15 billion.

With a forward P/E ratio of 24.7 BABA is not a cheap stock when compared to the S&P500 index, which is slightly lower at 22.3. But at the same time BABA is growing a lot faster than the market average when looking at its revenue and earnings. And when considering other measures of performance, Zacks’ Equity Research suggests that “BABA has returned about 21.78% since the start of the calendar year. Meanwhile, the Retail-Wholesale sector has returned an average of 20.62% on a year-to-date basis. This means that Alibaba Group Holding is performing better than its sector in terms of year-to-date returns.”

China’s economy is expected to slow down amid the recent trade spat with the U.S. But even with a lower than expected GDP growth rate around 6%, it’s still higher than most of the world. For investors willing to take on the risk of a major Chinese company, BABA shares on the NYSE may be worth looking at.

This author holds 15 shares of BABA as of writing this post.

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