Shares of Chinese ecommerce and technology giant Alibaba (NYSE:BABA) have tumbled in early May amid escalating trade tensions between the U.S. and China. What was once a big 2019 rally in BABA stock, is now a sharp sell-off. As of this writing, shares have dropped more than 10% over the past few trading days alone.

But, this weakness seems temporary, and long term investors may be able to find opportunity in the sell-off.

There are a lot of moving factors at play here. But, the most important of these factors is that global economic conditions are improving, especially in China, and that this is creating a fundamental growth tailwind for BABA stock. Sure, escalated trade tensions and higher tariffs threaten that renewed China economic strength. But, such trade related weakness is narrow and likely ephemeral.

Consequently, BABA stock is dropping big right now on headwinds that won’t last. That means that while the near term outlook for Alibaba stock is uncertain, the long term outlook remains quite healthy. Whenever you have that set up, buying the dip is the right thing to do. But, patience is necessary, and the buying should be done in small chunks on the way down.

All in all, this stock looks good on this sell off. I’m a buyer on further weakness.

Core Growth Remains Robust

For all intents and purposes, through it’s various retail and technology services platforms, Alibaba is the heartbeat of China’s digital economy. Thus, the core growth narrative here is all about China. As goes China, so goes Alibaba.

Right now, after a 2018 slowdown, China is rebounding in a big way in early 2019.

First quarter GDP in China rose by 6.4%, topping expectations for a 6.3% rise. That 6.4% GDP growth rate is the same GDP growth rate as the fourth quarter of 2018, so broad economic expansion in China is no longer slowing. Further, March retail sales rose nearly 9%, also topping expectations, amid rebounding consumer confidence. Industrial production and activity have also been steadily improving in 2019.

All in all, China is back. To be sure, escalated trade tensions do throw a wrench in this rebound narrative. But, for companies with mitigated trade exposure to the U.S. like Alibaba, escalated trade tensions don’t impact the core growth narrative.

Further, both the U.S. and China have been negatively impacted by escalating trade tensions before, so both are incentivized to get a deal done soon. As such, trade related weakness is narrow and ephemeral. The dip in BABA stock may last longer, so patience is necessary, but this dip will ultimately reverse course in the long run as trade related weakness fades.

Valuation Looks Attractive

The attractive thing about BABA in this sell off is that the stock is now dramatically undervalued relative to its long term growth potential.

In the big picture, this is a company with robust and dominant exposure to Asia’s rapidly evolving and expanding digital economy. Currently, Asia’s internet penetration rate is just over 50%, and rapidly rising. Over in North America and throughout Europe, the internet penetration rate is near 90%. Asia is on track to get there one day. That implies 40 points of internet rate expansion, which equates to well over 1.5 billion new internet consumers in Asia’s digital economy over time.

That’s huge growth potential, and Alibaba is at the center of all of it. As such, this company reasonably projects as a 20%-plus revenue grower over the next several years, while margins should naturally benefit from operating leverage and scale. Putting all that together, $18 in EPS seems doable by fiscal 2025.

Based on a growth average 20 forward multiple, that equates to a fiscal 2024 price target for BABA stock of $360. Discounted back by 10% per year, that implies a reasonable 2019 price target of over $220, versus a price tag today of under $175.

Bottom Line on BABA Stock

Alibaba stock is reasonably falling as trade tensions rise, but these tensions won’t rise forever. Their negative impact on Alibaba will be narrow. As such, while today’s sell off makes sense, it’s also an opportunity to buy for long term investors.

As of this writing, Luke Lango was long BABA.