Chinese stocks are toxic right now.
The Shanghai Stock Exchange is 47% off its June 2015 highs, dragged down by a Chinese economy that is growing at its slowest pace since the global recession. With growth expected to slow even further this year, there’s sure to be more short-term pain ahead for Chinese stocks.
But that doesn’t mean there aren’t plenty of very appealing long-term investment opportunities in the Far East. And Alibaba Group Holding Ltd (BABA) stock is one of them.
Alibaba Growth Unique for Its Size
For those who aren’t familiar, Alibaba is a Chinese e-commerce goliath that provides consumer-to-consumer, business-to-consumer and business-to-business sales online. It’s essentially the Amazon.com, Inc. (AMZN) of China.
Few companies in the world as large as Alibaba ($174 billion market cap) are growing as fast; the company has averaged better than 31% sales growth over the past four quarters, while profits more than doubled in the most recent quarter.
Analysts aren’t expecting a slowdown anytime soon: Alibaba’s sales are forecast to continue rising at better than 30% through at least 2017, while earnings per share are expected to improve in 2016 and 2017.
At a time when China’s once-unparalleled economic growth is sagging, that’s pretty impressive growth.
And yet … Alibaba stock is down 16% in the past three months. Why? I say it’s little more than guilt by association. In the markets, a rising tide lifts all boats, and a tidal wave sinks them — even one of the biggest boats.
Eventually, BABA stock will right the ship. There’s just too much growth going on here for it not to.
For example, in November, the company bought out Youku Tudou Inc (ADR) (YOKU), which is essentially the YouTube of China, for $4.6 billion, instantly making Alibaba the market leader in the country’s booming online video industry — an industry that’s expected to triple in the next four years.
It also has Alipay, an online payment option now available in more than 100 countries; a burgeoning cloud-services business; and is planning to build its own online movie-ticket and restaurant-booking service. Diversifying its product offerings should help make Alibaba less vulnerable to stiff competition from JD.com Inc(ADR) (JD), a smaller but faster-growing Chinese e-commerce company that targets high-end shoppers in China’s largest cities.
But JD.com is a niche company with a singular focus. Alibaba is a multiplatform, multinational (6% of its business comes from outside of China, with much more global expansion to come) enterprise that is essentially morphing from China’s Amazon to its Alphabet Inc (GOOG, GOOGL) before our very eyes.
One other thing Alibaba (and, for that matter, JD.com) has going for it: while most of China’s older industries — exports, steel, coal, concrete — are in free fall, consumer discretionary spending has been relatively unfazed, with retail sales still growing at double digits year over year.
Alibaba Stock on Sale
Perhaps the biggest reason to like Alibaba stock right now is that it’s most definitely on sale. BABA trades at a mere 3.2 times 2017 earnings estimates (its 2017 fiscal year begins in April) — and those estimates could well be conservative. It also boasts a cash-to-debt ratio of better than 2-to-1, holds $7.45 per share in cash, and has a very healthy profit margin of 36%.
Then there’s the chart. BABA stock got out of the gates quickly after going public at $93 a share in September 2014, rising to $119 in its first two months. Then the bottom fell out, and Alibaba stock spent the ensuing 10 months spiraling down as low as $57 this past September. Since then, it has been showing signs of life, advancing to $85 in November before tumbling all the way back to $60 earlier this month.
Now BABA appears to be on the uptick again, opening at $70 this morning. With China’s economy still wobbling, BABA stock is likely to experience more ups and downs in the weeks and months ahead. Over the long term, however, patient investors will be rewarded.
Given the domestic growth, plans for global expansion and ever-diversifying array of products beyond just e-commerce, Alibaba stock should make for a very profitable long-term investment — especially if you buy at these bargain levels.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
