Alongside the rest of the tech sector, Alibaba Group Holding Ltd (NYSE:BABA) stock has sold off recently while the rest of the market has rallied.
Over the five days ending December 4, BABA stock had fallen 9% while the S&P 500 rallied nearly 2% and the Dow Jones rallied more than 3%.
This sell-off feels overdone. While a rotational trade away from BABA and other hyper-growth tech stocks toward low multiple, big tax-rate stocks makes sense with investors focused on U.S. tax reform in the near-term, tech stocks won’t stay down for long. After all, there is a reason tech has been leading the market higher for the past several years. The fundamentals for these companies are just that strong.
In particular, the attractively valued BABA stock should rebound quite strongly.
Much like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL), BABA stock represents big growth at a big discount. The company is in the right spaces (China, digital commerce, cloud, and mobile). Growth is robust and isn’t showing any signs of slowing anytime soon. The company has multiple revenue growth drivers in place over the next several years. And the valuation remains reasonable at just 33.5x this year’s earnings estimate for what analysts see as 30% earnings growth over the next several years.
Overall, then, I’m taking advantage of the recent weakness in tech to pick up big growth stocks at good discounts. At the top of my “dip buying” list is BABA stock, given its reasonable valuation and robust growth prospects.
There are many reasons to like the Alibaba growth narrative, and most of them center around the fact that Alibaba is at the heart of one of the biggest secular growth stories in recent memory.
China’s middle-class is starting to urbanize at an unprecedented rate. This is big news because China has so many people. China’s working population numbers 770 million, more than 5 times as big as America’s working population. Therefore, as these 770 million Chinese consumers start to adopt the consumer behavior and spending habits of America’s 140 million consumers, growth will be huge and far-reaching.
Alibaba is at the heart of this growth.
Alibaba’s biggest business right now is its retail operations, which the company calls “core commerce.” Core commerce represented about 84% of revenues last quarter, with most of those revenues coming directly from China. Thus, as goes the China retail growth narrative goes, so goes the Alibaba growth narrative.
The China retail growth narrative is only heating up.
Alibaba’s core commerce revenue growth has gone from 45% last year to 63% last quarter. User-base growth is also accelerating despite its massive size. Alibaba added 11 million active consumers three quarters ago, 12 million two quarters ago, and 22 million last quarter.
This growth acceleration from an already high-growth base is unusual, and it’s owed entirely to the fact that the China retail growth narrative is only strengthening. With growth still accelerating in this segment, we still have a long ways to go before Alibaba’s core commerce growth opportunity is tapped out.
Alibaba is also doing all it can to ensure it wins on all fronts of the China retail growth narrative. A big believer that not all retail growth will come from the digital channel, Alibaba is building out a brick-and-mortar presence. Most recently, Alibaba has taken a $2.9 billion stake in China’s biggest grocer. It is not too dissimilar from what Amazon.com, Inc. (NASDAQ:AMZN) is doing in the U.S. with Whole Foods Market, Inc. (NASDAQ:WFM).
The whole Alibaba growth story encompasses more than just the China retail boom.
Alibaba is also the leading cloud player in China. That growth narrative is also accelerating. Cloud computing revenue growth went from 96% in the first quarter to 99% in the second quarter. In fact, Alibaba Cloud is the fastest-growing major cloud platform in the world. With only 2.6% market share, Alibaba Cloud has a long runway for growth ahead of it.
With Alibaba, then, you have a company with accelerating growth in two rapidly growing markets. That is an excellent combination which should lead to BABA stock heading higher.
BABA stock is trading at 33.5x this year’s earnings for robust 30% earnings growth prospects over the next two years. That is a price-to-earnings/growth (PEG) ratio of just over 1.1.
To put in perspective just how cheap that is, look at the S&P 500. It’s trading at 20x this year’s earnings for roughly 10% earnings growth prospects. That is a PEG ratio of 2.
Considering how remarkably cheap BABA stock is relative to its growth prospects, I don’t think investor demand for BABA stock will remain depressed for too long. I’m taking this opportunity buy Alibaba stock while it’s on sale.
As of this writing, Luke Lango was long BABA, FB, GOOG, and AMZN.