The Alibaba stock continues its climb into the clouds

<p>Alibaba (NYSE: BABA) reported strong results on February 13, beating analyst estimates at both the top and bottom lines. And yet the Alibaba share fell by 2% in the news.

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The probable suspect for investors’ lack of enthusiasm?

Coronavirus. It has hung over the markets like a big cloud blocking the sun. It also fell on Alibaba shares on Monday. Until investors feel that the worst has happened, all Chinese companies are facing a significant headwind – even the mighty Alibaba.

Failed to start

The Alibaba share has now generated a loss on an annual basis. Its peers do not look much better.

Throughout the time I have been following stocks, Alibaba is one of the most mercury-active stocks I have ever known. Its total return in one year, three years and five years is 27.7%, 29.5% and 20.3% respectively, and yet it seems to be constantly underperforming the rest of the markets.

If someone told me that I could get a guaranteed 20% annual return over the next five years, I would say, where do I sign up? Yet that is what Alibaba has done for its shareholders.

With $ 50.4 billion in cash at the end of December (83% higher than a year earlier) and a free cash flow of $ 19.4 billion (43% higher than the year before), Alibaba has an incredibly strong foundation to grow its Empire. I remain optimistic about its future and believe it is one of the best long-term purchases investors can make.

In October, I recommended that investors buy their shares despite the fact that Vince Martin, my InvestorPlace colleague, claimed that there were no catalysts to drive its stock higher.

I did not argue why I thought catalysts existed, contrary to Martin’s assertion. Instead, I pointed to Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) which suggested that Alibaba’s various parts were worth more than its current market value of $ 459 billion (four months ago). This is an argument that Buffett supporters have maintained for several years.

Today, its market capitalization is $ 553 billion, giving investors an annual return of 61.5%. Not bad for a distance stock.

One of the parts of the business that seems to add value to Alibaba’s investment proposal right now is the company’s cloud business, an often forgotten part of the house that Jack (Ma) built.

The sound of the cloud to profitability

The only thing I like to do with my writing and analysis is to give credit when credit depends on it.

My editor asked me to write about Alibaba this week. I was looking for a unique angle and came across Leo Sun’s article on Motley Fool on February 15 about the company. His observations brought me back to a segment of the business that I have not thought about for a while.

Alibaba Cloud is still unprofitable, but its adjusted EBITA margin improved from a negative 4% a year ago to a negative 3%. These advances are encouraging and suggest that economies of scale begin when it exploits its dominance of China’s cloud infrastructure market to expand into overseas markets, Sun says.

“It also suggests that Alibaba may stop subsidizing the growth of its cloud operations with its core business in the future.”

Back in January 2018, I wrote an article titled 3 Ways Alibaba Group Stock Gets to $ 400. One of the ways was through the cloud.

“Investors are well aware that Amazon’s profits are largely driven by AWS, its cloud computing business. It is the profit center that enables Amazon to venture into areas such as advertising without breaking the bank, I said.

“Alibaba would do itself a great service if it could get to the same point in its development.”

Sun’s comments make it clear that Alibaba is not there but it is making progress. The sooner it becomes an independent, completely independent part of the Alibaba Empire, the faster BABA becomes $ 400.

During the third quarter, Alibaba’s cloud business grew 62 percent year-on-year, reaching 10 billion yuan for the first time in its history.

“We believe that the migration of Alibaba’s central e-commerce system to the public cloud is a watershed event. Not only will we ourselves have greater operational efficiency, but we believe that it will also encourage others to adopt our public cloud infrastructure, says CEO Daniel Zhang in his conference call.

According to Techcrunch, Alibaba has a $ 6 billion run, good for fourth place in the cloud infrastructure market, behind Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOG, NASDAQ: GOOGL) Google in that order.

That’s what I call progress.

The conclusion of the Alibaba stock

Just halfway to $ 400, it’s clear that Alibaba will not beat it by 2020.

However, if its non-GAAP EBITA margin were to be positive sometime in the 2020 calendar, I could see it testing $ 300 sometime later in the year.

With that said, I would keep some dry powder to buy its stock in May after it reported damage caused by coronavirus. It is likely to put some downward pressure on its stocks.

Still, Alibaba should be on your list of long-term shares to own.

Will Ashworth has been writing about full-time investing since 2008. Publications where he has appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger and several others in both the United States and Canada. He especially likes to create model portfolios that pass the test of time. He lives in Halifax, Nova Scotia. At the time of writing, he had no position in any of the above securities.