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4 Things You Should Know Before Buying Alibaba

Despite the economic contraction in China in the first quarter, the US-China tensions, and the coronavirus outbreak, Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) stock has done really well in 2020.

As of late July, Alibaba shares are up 17% year-to-date, easily beating the Hang Seng Index, which is down over 10% so far in 2020.

The market is bullish on Alibaba’s future and rightly so. Given that Alibaba released its annual report, here’s more on the company’s progress and four things investors should know about it going forward.

1. Alibaba FY2020 financials

Even though it’s a huge company, Alibaba is growing rapidly.

For fiscal year 2020, Alibaba total sales rose 35% year-on-year to RMB 509.7 billion (US$72.8 billion) and its core commerce sales also rose 35% year-on-year.

In terms of “owner’s earnings”, Alibaba is also doing quite well. Adjusted free cash flow was RMB130.9 billion, giving the company plenty of resources to invest in new growth areas or to buy parts of other companies.

Due to its growth, Alibaba has a huge customer base. In its annual report, it reported having 780 million customers in China and more than 180 million customers outside of China.

Having a huge user base is important because it makes future growth easier. With a huge user base, Alibaba can cross-sell products and services or scale up new products or services relatively quickly if there is demand.

2. Ambitious future user base goals  

In terms of its future, Alibaba hopes to have an even larger user base. In terms of its 2024 strategic goals, Alibaba hopes to serve over 1 billion consumers in its China consumer business.

By 2036, Alibaba hopes to serve 2 billion customers worldwide and create 100 million jobs in the process.

Given Alibaba’s past history of good execution, management’s goals are achievable.

3. Well-positioned in Artificial Intelligence

In perhaps the biggest future growth market of all, Alibaba believes it is well-positioned. The company writes:

“We believe we are one of the few companies in the world with a proprietary, distributed deep learning platform that has access to consumer insights across diverse businesses involving a rich variety of consumer experiences.

As a result, we believe we are in a unique position to develop large-scale commercial use of AI.”

Alibaba has thus far used AI to enhance shopping recommendations and personalis search results.

4. Alibaba Cloud is growing quickly

One area of strong growth for Alibaba is its cloud division. Sales of Alibaba Cloud have grown quickly over the past five years:

Alibaba Cloud sales (RMB billions)

FY16

FY17 FY18 FY19 FY20
3.02 6.66 13.39 24.70

40.02

Source: Alibaba FY Annual Report

For FY20, Alibaba Cloud continued to grow rapidly, with sales rising 62% year-on-year, or almost twice as fast as the company’s core commerce sales increase of 35% year-on-year.

Given the rise of 5G, which could unleash future demand from autonomous cars and the industrial internet, many believe there is a lot of growth left in China’s cloud.

Given that Alibaba is currently the leader in China’s cloud market, the company is in a great position to capture a lot of the future sector growth.

In the fourth quarter of 2019, Alibaba Cloud had 46.4% of the cloud infrastructure services market in China according to research firm Canalys.

Foolish conclusion

Alibaba has grown quickly over the past fiscal year and the company believes it has more growth left in areas such as its user base, AI, and the cloud.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.