Despite the trade war and the exit of founder Jack Ma, Alibaba (NYSE:BABA) stock has held steady. Based on the company’s August 15 earnings report on August 15, the growth train keeps chugging along. And not just with their core retail business. Cloud computing revenue soared 66% from the prior year’s quarter. The cloud computing segment’s operating losses are coming down as the business grows.
But will we see big moves in the short-term for Alibaba stock? Shares trade at a fair valuation. But a trade war-driven economic slowdown could send shares lower. With this in mind, it may not be the time to buy BABA stock.
Recent News at Alibaba Group
Alibaba performed well for the quarter ending June 30, 2019. The core Chinese retail unit grew 40% year-over-year. The Chinese wholesale business also saw significant sales growth (up 33% YoY). Alibaba’s non-China retail and wholesale businesses also saw decent growth (mid-20% growth YoY).
This growth helps to justify its current valuation. This is similar to what we see with Amazon (NASDAQ:AMZN) in the U.S. Alibaba Group continues to scale, even as it inches closer to the $100 billion sales mark. As InvestorPlace’s Tom Taulli wrote on Sept. 25, Alibaba is on the right side of many trends.
These include the rise of China’s middle class and the explosive growth of Chinese e-commerce. But other catalysts could move the needle for Alibaba stock.
Cloud computing could become a key profit driver. The cloud segment’s operating losses are narrowing. Analysts such as CFRA’s John Freeman are bullish. He pointed out that Amazon’s AWS unit generated a little more than 10% of the company’s revenue but over 60% of its operating profit. He believes this could someday be the same for Alibaba.
But Alibaba Group faces two key risks. An unresolved trade war could serve as a recession catalyst. Competition in China is another key risk. As I have previously discussed, rivals such as JD.com (NASDAQ:JD) are catching up fast. This could impact Alibaba’s core Chinese retail business. Alibaba Group also faces competition in cloud computing. Cloud competitors inlcude Tencent (OTCMKTS:TCEHY) and Baidu (NASDAQ:BIDU). But Alibaba’s market power could mitigate this issue.
So what does that mean for BABA stock valuation? Based on valuation metrics, Alibaba Group looks fairly priced.
Fairly Priced However You Look
Alibaba stock trades at a forward price to earnings (forward P/E) multiple of 38.7x. The company’s enterprise value/EBITDA (EV/EBITDA) ratio is 27.1x. On a forward P/E basis, BABA stock is cheaper than Amazon. But both stocks sell at similar EBITDA multiples. AMZN trades at a forward P/E of 74.6x, and an EV/EBITDA of 27.3x.
How about BABA’s Chinese peers? JD.com’s forward P/E is 38.7.x but its EV/EBITDA ratio (39.2x) is much higher. Tencent trades at a forward P/E of 28.8x, and an EV/EBITDA of 22.6x.
It’s safe to say Alibaba Group trades at a fair valuation. The forward P/E and EBITDA multiples are reflective of the company’s growth. But any disruption could materially impact the BABA stock price. This makes it tough to justify a buy. But at a lower price, Alibaba stock becomes a more compelling opportunity.
It May be Too Early to Buy Alibaba Stock
Alibaba stock has long-term potential. Growth may slow in retail. But cloud computing could someday be a cash cow. However, the company’s economic moat is not secure. Facing competition at home from JD.com, Tencent, and others, the pressure is on Alibaba Group to stay on top.
The current valuation reflects these growth prospects. The trade war risk may be priced into the stock. But shares could fall further if the situation accelerates. Trade restrictions would materially impact China’s economy. With a cooling economy, BABA’s growth story is seriously threatened.
With this in mind, it may be too early to buy Alibaba stock. A recession could give investors a better entry point. There’s plenty of time to play the Alibaba cloud catalyst. Keep an eye on BABA stock, but make your move when the price is right.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
