Daily Gains Letter

Alibaba: How a Small Idea Is Becoming a Major World-Class Company

By for Daily Gains Letter |

Alibaba Reporting TomorrowWhile China has been struggling to regain its former luster as the top growth region in the world, we are seeing some dynamic growth in the technology space, namely the Internet and mobile areas, where the country is tops.

While still somewhat early in its infancy as a technology basin, China does offer the single largest market in the world, with more than one billion either surfing the Internet or tapping away on their mobile phones. The potential is enormous for the technology sector companies in China—and one major highlight American investors should add to their watch list (if they haven’t already) is Alibaba Group Holding Limited (NYSE/BABA).

Alibaba to Report Tomorrow

Tomorrow morning, prior to the market’s open, all eyes will be on Chinese Internet powerhouse Alibaba, which debuted in the U.S. in October and has become a major trading vehicle for technology and momentum traders. Under its somewhat underwhelming founder Jack Ma, Alibaba has become a dominant player in China and is aiming to become a thorn in the side of major U.S. Internet companies.

The stock has traded as high as $120.00, but it fell to $82.81 on October 15, which provided traders an opportunity to buy. Alibaba has since recovered to $100.00 and could launch higher, depending on its earnings news tomorrow morning.

In my view, it’s a win-win situation. If the results disappoint, we could see an investment opportunity to buy on weakness. A strong quarter, however, could see the stock vault out of the gate for current shareholders. In this case, some investors interested in the company will have to wait and buy on dips.

How Alibaba Compares to American Internet Giants Facebook and Google

Unlike many companies out of China, I feel Alibaba is the real deal. “The Google of China” has its eyes on expansion into new markets and products.

With a market cap of $258 billion on Monday morning, Alibaba is bigger than Facebook, Inc. (NASDAQ/FB), but smaller than the $363-billion valuation assigned to Google Inc. (NASDAQ/GOOG). Based on a comparative valuation, Alibaba (at 35X) is cheaper than Facebook (41X), but above the attractive 18X of Google (which is why Google remains many analysts’ top pick in the Internet space).

What I like about Alibaba is the potential for superlative growth not only in China, but also throughout the world.

What’s to Come for Alibaba: Superlative Revenue Growth

Jack Ma appears to have a good vision of what he wants to do with his company. He wants to connect the world, as far as the global marketplace goes, having American-made goods easily sold in China and vice versa. Alibaba also has a strong electronic payment system that actually rivals PayPal; Ma may look to spin off this business to unlock further value in Alibaba.

Alibaba is estimated to grow its FY15 revenues by 50.2%, followed by another 38.3% in FY16, based on estimates by Thomson Financial. These huge metrics are deliverable.

Going forward, I’ll be keeping a close eye on Alibaba. It’s a great example of the kind of company to look at on weakness as a potential opportunity for investors.

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