Over the last three months shares in Alibaba Group Holding (NASDAQ:BABA) are down 17% and BABA stock looks scarier all the time.
Sounds terrible, but Amazon.Com (NASDAQ:AMZN) is down over 13% in that time, and Google parent Alphabet (NASDAQ:GOOGL) is down over 11%.
It has been a tough month for tech, as investors have switched their preferences from growth to value and found technology price to earnings ratios hard to swallow. This has been true on both sides of the Pacific, including for Alibaba, as the trade war put a chill on what had been a mutually beneficial U.S.-China relationship.
But don’t confuse a change of fashion, or a shift in the political winds, for a change in fundamentals. Alibaba’s fall has only made it a better value for young investors.
The Fundamentals and BABA Stock
At a market cap of about $379 billion, Alibaba still carries a PE of almost 44, and sells for almost 10 times last year’s $40 billion in revenue. But in its first quarter report for 2019, released on Nov. 2, revenue was growing 54% per year, and Alibaba’s cloud was growing 90% year over year.
The stock has kept falling because these numbers came up short of analyst estimates, by $50 million. The company also issued weak guidance, citing “fluid macro-economic conditions,” in other words the trade war.
Bears also noted that net income grew just 13% year-over-year, to $2.9 billion or $1.40 per share fully diluted. All that profit came from the company’s commerce operations. Its cloud and entertainment operations are losing money.
This stands in contrast with Amazon, where cloud is the primary profit driver. Alibaba is still investing for growth, at $4 billion per quarter. But not all that is going into data centers. The company is building out its fulfillment, its physical store network, and is building a new headquarters complex.
Analysts who saw all this growth and spending as great news a few months ago now see it as bad news. Price targets are being cut, but these targets remain $55-65 per share above where the stock was due to open for trade on Nov. 7, at about $147 per share.
That’s not bearishness. It’s just less bullishness.
BABA Stock and the Future
While Alibaba is a major cloud player, ahead of even Microsoft in the Asia-Pacific region (behind only Amazon), China represents just 30% of the cloud business in the region. China’s software as a service market, and its enterprise computing market, are both less mature than in the U.S. There are just fewer customers.
Alibaba is also far more devoted to in-store retailing than Amazon, building its own grocery stores and buying shopping malls, combining online and offline in what CEO Daniel Zhang calls “new retail.” It had been a wholesaler, the glue connecting small producers with urban markets. Now it’s taking charge of inventory itself.
Alibaba has greater payment infrastructure than Amazon, its growth opportunities in Southeast Asia and India are greater than those of Amazon, and it’s now more willing to sacrifice profit for growth than Amazon.
The Bottom Line on BABA Stock
Despite the recent fall in the stock, 45 of the 51 analysts following Alibaba are suggesting you should buy the stock. By way of comparison, 41 of 47 analysts following Amazon have buy recommendations.
This should not be true for everyone. If you really believe the U.S. trade relationship with China is undergoing a permanent rupture, then sell all tech companies, including Alibaba. If you’re an income investor, and retired, I think Amazon will be paying dividends before Alibaba.
But if you’re under 40 and already have cash in index funds, if you want to build a portfolio focused on growth, Alibaba is a bargain.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and AMZN.
