Shares of Alibaba Group Holding Ltd (NYSE:BABA) still appear undervalued despite the company already significantly outperforming the market. If you bought stock in Alibaba since the end of December, you’re up almost 20%.
Yet, for reasons I will outline, Alibaba stock — thanks to emergence in the cloud and the momentum in its core e-commerce business — can still deliver 25% returns in the next 12 to 18 months.
Assessing the Value in Alibaba Stock
Alibaba shares have risen some 15% year to date, compared with about 2% rise in the S&P 500 Index. Based on fiscal 2018 earnings estimates of $4.30 per share, Alibaba stock is currently priced at a forward price-earnings ratio of roughly 23, which is about in line with the average stock in the S&P 500.
And here’s the thing: Assuming the company does earn $4.30 per share, that would translate to year-over-year earnings growth of 23%. From my vantage point, Alibaba stock remains one of the better bargains on the market even with its recent rally.
In other words, investors still have an opportunity to buy not only into a great growth story, but also diversify their investments by betting on the growth of China’s middle class. But Alibaba is more than just a bet on China’s recovering economy. The company, which saw a 54% jump in third-quarter revenue, leading to an impressive 17-cent beat on the bottom line, crushed Wall Street’s fiscal estimates on almost every metric.
Often compared to Amazon.com, Inc. (NASDAQ:AMZN) because of their e-commerce similarities, Alibaba founder/executive chairman Jack Ma and CEO Daniel Zhang prove they can do what Amazon CEO Jeff Bezos has shown a knack for: Mash the profit-margin accelerator whenever he feels like it and when the market least expects it. And as with Amazon, Alibaba’s cloud platform Alicloud (which posted a 115% year-over-year jump in revenue) has become a force.
Not only is Alibaba enjoying an increase in the number of paying customers, the customers are also spending higher than usual. All told, the company’s strong revenue growth, driven by its diversified technological and data strategy continues to pay off. And with the company boosting its 2017 fiscal year revenue growth guidance from 48% to 53%, Alibaba is showing no signs of slowing down.
Bottom Line for Alibaba Stock
With cloud revenues beginning to take a bigger portion of the business, combined with the strength in its core e-commerce operation, BABA has tons of room to run.
As such, while I’m not willing to suggest BABA deserves the same respect as Amazon, which is priced at a forward P/E of 63, Alibaba should command a P/E of 30, which puts Alibaba stock at around $130, delivering almost 25% to 30% in the next year-and-a-half or so.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
