Why You Should Stick With Alibaba Stock on the Rebound

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Shares of Chinese technology giant Alibaba (NYSE:BABA) have been on a tear over the past month, rising more than 8% during that stretch amid cooling global trade tensions and signs of a rebound in Chinese economic activity. At present, Alibaba stock trades hands at $185, its second-highest mark of the year and only a few percentage points shy of its all-time high posted back in mid-2018.

Hot China Stocks to Buy on the Rebound: Alibaba (BABA)

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But will it happen? Will Alibaba stock retake all-time highs? And if so, when?

In short, yes and soon. Recent favorable fundamental developments imply that Alibaba stock has enough firepower to shoot well above $200, and the pace at which these fundamentals are improving imply that BABA stock will get there quite soon.

The investment implication? Stick with the rebound in Alibaba stock. This one is going higher in 2020.

BABA’s Fundamentals Are Improving

The fundamentals underlying Alibaba stock are dramatically improving. This breaks down into two parts. First, the externals are improving via a rebound in Chinese economic activity. Second, the internals are improving via revenue growth stabilization and margin improvements.

On the externals front, China’s economy has been slowing since January 2018 amid escalating trade tensions between the U.S. and China, which have weighed on corporate confidence and economic activity. But these trade tensions have eased meaningfully over the past few months. As they have, economic activity has shown signs of picking up.

Just look at the OECD’s economic leading indicator data for China. That reading has improved for seven consecutive months, with the most recent month’s data showing a year-over-year improvement for the first time since the slowdown started.

On the internals front, Alibaba’s growth trajectory is naturally improving as China’s economy bounces back. That is, revenue growth rates have stabilized over the past two quarters around the 40% range, whereas they were previously on a steady decline from 60% to 40%. Further, while most of fiscal 2018 and all of fiscal 2019 were defined by big margin erosion, margins have improved meaningfully in fiscal 2020 as big growth-related investments have peeled back.

Big picture: China’s economy is bouncing back, and as it is, Alibaba’s revenue growth rates are stabilizing and margins are heading higher. That’s a winning combination. So long as it persists, Alibaba stock should keep moving higher.

Alibaba Stock Can Take Out $200 Soon

The math here works out so that Alibaba stock looks positioned to take out the $200-level soon. From a high-level standpoint, China’s economy should continue to rebound because global trade tensions should continue to de-escalate, as neither side wants to re-escalate the trade war (U.S. President Donald Trump is heading into a re-election year, while China’s economy is finally getting its groove back).

So long as China’s economy stays in rebound mode, Alibaba’s revenue growth rates should stabilize in the 30-40% range. Meanwhile, margins appear to have stabilized after years of compression, and the most likely path forward for margins is for them to inch higher thanks to positive operating leverage.

Putting all that together, Alibaba reasonably projects as a 30-40% revenue grower in the near-term, with upside margin drivers. That paves the path for huge 40%-plus profit growth.

BABA stock trades at 25-times forward earnings. That’s simply too cheap for 40%-plus profit growth potential. Consider that Wall Street’s fiscal 2022 earnings per share estimates sit around $11.25. Also consider that growth stocks normally trade around 20-times forward earnings. Combining those two realities, a realistic fiscal 2021 price target for Alibaba stock is $225. Discount that back by 10% annually, and you arrive at a fiscal 2020 price target of $205.

Thus, in the big picture, the fundamentals support a rally in Alibaba stock to above $200 within the next few months.

Bottom Line on BABA Stock

Alibaba stock is a long-term winner that is finally getting its groove back thanks to easing U.S.-China trade tensions. So long as Alibaba keeps its groove, the fundamentals say that Alibaba stock should keep marching higher.

As of this writing, Luke Lango was long BABA. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/why-you-should-stick-with-alibaba-stock-on-the-rebound/.

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