While China Reels, BABA Stock Is Looking Dirt Cheap

BABA stock - While China Reels, BABA Stock Is Looking Dirt Cheap

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Alibaba (NYSE:BABA) stock has recovered lately, bouncing 10% off its lows. But the shares are still well off the highs. Since June, the BABA stock price has gone from $211.70 to $149.60.

Part of this has been due to the recent volatility in the markets, which has weighed on tech operators. But of course, Alibaba stock has also been under pressure because of the slide in Chinese shares. Just look at the drops in companies like JD.com (NASDAQ:JD), Baidu (NASDAQ:BIDU) and Weibo (NASDAQ:WB).

No doubt, the uncertainty of the US trade policies has taken toll. Given that China still relies heavily on foreign trade, there could be a deceleration of the growth rate for the macroeconomy. The government has also lowered interest rates to deal with the issues.

Given all this, analysts from such companies as Barclays (NYSE:BCS), KeyBanc and Deutsche Bank (NYSE:DB) have lowered their price targets on BABA stock.

So yes, all this sounds kind of bleak, right? Perhaps so. But it is during such times when contrarian plays can payoff.

Taking Another Look at BABA Stock

As for BABA, the company has a commanding leadership position in secular growth markets like ecommerce, cloud computing and entertainment. These business also have strong barriers to entry, such as network effects and massive scale.

Customers have essentially become locked-in to the BABA platform, making it difficult for competitors to make much of an impact. Consider that the company has 576 million annual active customers, up 24% on a year-over-year basis, as well as 634 million mobile MAUs (Monthly Active Users), up by about 17 million.

In the meantime, there are some powerful megatrends that should continue to grow revenues. Note that the middle class in China is projected to hit about 600 million by 2022 and about 90% of the growth in GDP is coming from domestic consumption.  What’s more, the forecast is for the ecommerce market to go from $470 billion in 2018 to $839.54 billion by 2021.

But what about the tariffs?  Well, there will probably be short-term pain, but BABA has been taking swift actions to adapt.

According to the executive chairman Joe Tsai:

“If U.S. goods become too expensive due to tariffs, Chinese consumers can shift to domestic producers or imports from other parts of the world. In terms of our international expansion, the world is a big place. We have made substantial progress in emerging markets like Southeast Asia and South Asia, as these markets are right for us to add more consumers into our ecosystem.”

BABA has also been investing heavily in its technology infrastructure, such as AI (Artificial Intelligence), IoT (Internet-of-Things) and machine learning. These initiatives will help bolster the company’s competitive advantages.

But for now, it looks like these technologies will be most critical for the cloud segment. During the latest quarter, the revenues soared by 93% to $710 million. And the customer base is diverse, with companies like Minsheng Bank, China Communications Construction Group and InterContinental Hotels Group.

Bottom Line on BABA Stock

Going forward, there will likely be volatility for BABA stock. Again, the situation with trade is a major wildcard.

But when it comes to bottom fishing a good approach is to stick to the market leaders, and BABA stock certainly fits the bill. Consider that during the latest quarter the revenues jumped by 61%.

And besides, the valuation already is accounting for much of this anyway, with the forward price-to-earnings ratio at 20X. In fact, even if the growth rate somehow was cut in half  (which seems unlikely) BABA stock would still represent a good value.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/11/baba-stock-looking-dirt-cheap/.

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