Despite issues relating to the trade war, Alibaba Group (NYSE:BABA) has held steady over the past few months. Alibaba stock has traded between ~$160/share and ~$180/share since July. But what’s next for the Chinese e-commerce giant? With earnings just around the corner, is now the time to buy BABA stock?
The U.S.-China trade talks have made progress. But, the “China discount” continues to loom over Alibaba stock. It’s tough to predict the unpredictable. Yet Alibaba’s fate may not be tied to the trade war.
Alibaba Group dominates Chinese eCommerce. The next frontier is AI and cloud computing. As China’s Amazon (NASDAQ:AMZN), the company is living up to its comparison. Let’s see why BABA stock could be an opportunity at the current price.
Recent News and Alibaba
The trade war continues to be the biggest driver for Alibaba, primarily due to indirect consequences.
Threats from the United States, such as delisting US-listed Chinese stocks or banning public pension funds from investing in China, have so far been speculation. But given the volatility of the trade relations, these risks are not off the table.
Even so, Alibaba’s growth prospects remain on target:
- Analysts estimate $72.4 billion in sales for FY ending March 2020 (21% boost from trailing twelve month sales of $59.8 billion).
- Growth continues into FY2021, with projected sales of $93.6 billion.
We could be getting ahead of ourselves. The company releases earnings Oct. 31. If Alibaba Group can beat estimates (as they did last quarter), shares could see big moves come Halloween.
But buying now may be a big risk. If the company falls short of estimates, shares could see a material decline. Investors may take this as a sign that the trade war has affected Alibaba’s business.
Risks are aplenty with BABA stock. But does the stock compensate for these risks in terms of valuation? Let’s take a closer look.
Alibaba Stock Is Fairly Priced
In spite of the “China discount,” Alibaba Group appears fairly priced. The company trades at a forward price/earnings (forward P/E) ratio of 36.9. This forward earnings multiple is substantially lower than Amazon’s (forward P/E of 75.1). But using the enterprise value/EBITDA (EV/EBITDA) metric, both companies trade at similar valuations. Alibaba’s EV/EBITDA ratio is 26.1. Amazon’s is 27.3.
Yet, compared to Chinese peers, BABA stock is cheap. Chinese eCommerce competitor JD.com (NASDAQ:JD) trades at 38.6 times forward earnings, and an EV/EBITDA ratio of 39.6. Pinduoduo (NASDAQ:PDD), operates at the lower end of Chinese retail.
It also sells at a rich valuation. Pinduoduo is unprofitable, so we’ll use the enterprise value/sales (EV/Sales) metric. Pinduoduo’s EV/sales ratio is 11.6, compared to BABA’s EV/Sales of 7.5.
Which one would you rather own? Amazon does not face BABA’s geopolitical risks. But Amazon’s runway is reaching its limits. Alibaba has runway both in China and worldwide markets.
Not just in retail, but AI & cloud computing as well. This variety of catalysts make it a more compelling play than JD.com and Pinduoduo.
The Bottom Line on Alibaba Stock
Alibaba stock faces headwinds. But the company’s positives may outweigh the negatives. After becoming “Amazon’s China”, BABA has the infrastructure to conquer new frontiers. This is not limited to just e-commerce. As InvestorPlace’s Tom Taulli recently discussed, AI and cloud computing could be a game changer for Alibaba stock.
In prior analysis, I said it it could be too early to buy BABA stock. Investors may be able to enter at a better price down the road. BABA’s growth story is far from over. Investors can buy later without missing out on the cloud catalyst.
I continue to hold this opinion, but with a caveat for long-term investors. Anyone looking for a short-term play with BABA stock stands to get burned. Recession risks loom. The trade war keeps going on. It’s too tough to predict where BABA stock will trade within the next six months.
But for a long-term investor, BABA may be worth the current price. As it stands now, you can buy BABA at a similar EBITDA multiple as Amazon. With the greater runway for Alibaba stock, this alone is a no-brainer.
You may face short-term price volatility, but it’s tough to time the market. On a long time horizon, buying BABA today may look like a shrewd move.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned companies.
