Alibaba Group Holding Ltd (BABA) stock is down 18.4% so far in 2016. On the surface, the sell-off makes sense: China’s economy is relatively weak and Alibaba is the largest e-commerce retailer in China. However, if there’s one thing that long-time investors know, it’s that financial markets can be extremely irrational, especially in the short-term.
But exactly how bad have things gotten in China…and what does that mean for Alibaba stock?
BABA: Lucky to Be in China
The general consensus in financial markets seems to be that the sky is falling in China. There’s no question that the staggering growth in the world’s second-largest economy has cooled. China recorded only 6.9% GDP growth in 2015, its lowest rate in 25 years.
However, while the rest of the world worries about recession, China’s growth still nearly tripled the U.S.’s 2.4% 2015 growth rate. It’s important to keep that in context when thinking about BABA stock.
The government recently lowered its five-year annual growth target for China to 6.5%. Yes, these projections may fall well short of the unrealistic market expectations analysts had during the boom years of China’s expansion, but they are still enviable by the standards of any other top global economy.
In a new report, Boston Consulting Group (BCG) projects a $2.3 trillion increase in China’s consumer economy by 2020 even if Chinese GDP growth falls to 5.5%, well below the government’s 6.5% target. That type of growth means that China will expand by more than the size of the economies of Germany, the U.K. or India in the next five years, even if growth slows further by another 1.4%. This is the “struggling” economy we keep hearing about that BABA operates in.
BCG expects China’s consumer spending to grow 55 percent from 2015 to 2020 compared to projected U.S. consumer spending growth of only 21 percent. BABA stock, obviously, has heavy exposure to the Chinese consumer. While that can be a bad thing, it wouldn’t appear to be a long-term concern.
What Does It Mean For BABA Stock?
Compared to U.S. tech peers, Alibaba stock appears to offer plenty of shareholder value. Alibaba currently trades at a P/E of 16 and a forward P/E of 19.5, both of which are reasonable compared to the current 20.6 P/E of the S&P 500.
However, it’s Alibaba’s growth that sets it apart. While high-growth names like Amazon.com Inc (AMZN) and Netflix Inc. (NFLX) have been awarded huge valuation premiums during the bull market, the same market seems skeptical of Alibaba’s growth. Incredibly, Alibaba stock currently trades at a 5-year expected PEG of only 0.89, according to Thompson Reuters. By comparison, that’s a lower PEG than Amazon, Netflix, Alphabet Inc (GOOGL, GOOG), Facebook Inc (FB), and the same as that of Apple Inc (AAPL).
The Bottom Line
Things could certainly get much worse in China before they get better. However, even the most conservative economic forecasts for China are calling for staggering growth in coming years. BABA stock is currently trading at a valuation discount to its high-growth American peers and presents an excellent buying opportunity for long-term investors willing to endure short-term market volatility.
As of this writing, Wayne Duggan was long BAC.
