Alibaba (NYSE:BABA) reported its fourth-quarter results May 15. It beat on both the top- and bottom-line. The initial investor reaction sent BABA stock higher. Since then it’s dropped by more than 11% to $155, edging closer to its 52-week low of $129.77.
Alibaba can’t get any respect.
As my InvestorPlace colleague Vince Martin recently said, Alibaba delivered a home-run quarter, and yet it couldn’t move higher suggesting that almost nothing is going to act as a catalyst for BABA stock.
I agree with that assessment.
However, investing is a game of patience. As Alibaba flirts with value territory, aggressive investors who believe in its business model are going to take advantage of the latest dip in the Alibaba stock price.
Here’s why you should too.
Good Things Come to Those Who Wait
Not only did Martin point out that BABA has been unable to benefit from a strong quarter, but he also highlighted the fact that Alibaba’s stock only has gained 69% since its second day of trading after its September 2014 IPO, underperforming many other internet-related tech companies.
If you’ve owned it since 2014, you must be wondering whether BABA stock is ever going to match its potential.
“There’s a case that Alibaba stock is going to rise eventually as long as it keeps performing,” Martin wrote May 24. “And is it really that impossible to believe that BABA could at some point pass the likes of Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) and become the world’s most valuable company? That’s the uber-bull case for BABA: dominant share in the world’s largest market means it could become the world’s biggest company at some point.”
Despite being pro-Alibaba, I’ve never gotten that excited about the company, although I did suggest in May 2017 that Jack Ma could become the next Jeff Bezos.
However, now that Ma has stepped back from the business, it’s up to Daniel Zhang to get Alibaba over the mountain.
A Look at Alibaba Stock for Now
In early May I wrote about what Alibaba needs to do for its stock to get to $250. At the time it was trading 21% higher than where it is as I write this.
For me, it boils down to international expansion, the cloud, and its other investments.
On the expansion front, Alibaba announced earlier in May that it was opening its ecommerce platform AliExpress to sellers in Italy, Russia, Spain, and Turkey to be able to sell to other countries on the company’s third-party platform.
It is part of Alibaba’s globalization strategy.
“We are seeing Alibaba trying to expand globally because they are trying to offset declining growth in China itself,” said Billy Leung, a director at Haitong, a Chinese securities firm. “They are at the point when they need a lot of growth to come from AliExpress and Lazada and other international businesses.”
Sure, growth at home is shrinking, but it’s not as if it’s terrible.
In fiscal 2019, its China retail marketplaces generated $853 billion of gross merchandise value (GMV), 19% higher than a year earlier. Furthermore, its China commerce retail business, which accounts for 63% of revenue, grew 40% year over year to $36.9 billion.
That’s plenty of business if it continues to grow its international e-commerce. I believe actions like the announcement in May suggest it’s on its way.
Alibaba Stock and the Cloud
The other key point if Alibaba stock wants to get to $250 is that its cloud business has got to start making money.
In fiscal 2019, the company’s cloud segment grew revenue 84% to $3.7 billion. However, it lost $172 million on an adjusted EBITDA basis, 5% higher than a year earlier. That said, its margins improved slightly during the year, holding a glimmer of hope that it can get to breakeven in fiscal 2020.
There’s no doubt that its cloud business is a big deal in China. Like its e-commerce, investors are waiting to see how things go outside China. Investors are looking for a catalyst outside its home market.
The Bottom Line on BABA Stock
Alibaba generated $15.6 billion in free cash flow in fiscal 2019. That’s 28% of its overall revenue. By comparison, Amazon’s free cash flow is just 8% of its total sales. Yet, Amazon trades at 27 times cash flow compared to 19 times for Alibaba.
My take on this latest correction: back the truck up and buy away.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
