With Alibaba (NYSE:BABA) stock just off its 52-week high, is now a good time to buy the shares? After treading water in the middle of 2019, Alibaba stock has rallied since November, with investors no longer discounting the company due to the trade war. As a result, the shares’ valuation has risen meaningfully. But the stock can still rise much further.
Everybody knows that BABA is dominant in the Chinese e-commerce sector. But the company’s new frontiers will drive Alibaba stock higher. Specifically, cloud computing and financial services could propel the “Amazon of China” to new levels. And even if U.S.-China trade tensions return, Alibaba’s underlying business may not be negatively impacted.
Alibaba Stock Has Multiple, Positive Catalysts
Alibaba’s core e-commerce business is not the only factor that could push BABA’s shares higher. Cloud computing and financial services are key potential catalysts for BABA. But e-commerce is no slouch in the growth department. In the third quarter, Alibaba’s core Chinese e-commerce business grew 40% year-over-year.
But will BABA’s e-commerce unit continue to expand this year? According to the International Monetary Fund, China’s GDP will climb 6% this year. That would mark a deceleration from prior years. But it may be enough to enable the country’s e-commerce sector to continue to expand. And while BABA’s e-commerce unit is growing rapidly, its cloud computing unit, which expanded 64% quarter-over-quarter in Q3, is delivering real growth for the company.
As InvestorPlace contributor Dana Blankenhorn wrote in his column published on Jan. 21, Alibaba’s cloud offering may be more powerful than Amazon’s (NASDAQ:AMZN). Providing more advanced services and applications, Alibaba has a great opportunity to dominate cloud computing, both on its home turf and throughout Southeast Asia.
How about financial services? Alibaba has Ant Financial. While Alibaba owns just 33% of this entity, Ant Financial is growing fast. As InvestorPlace contributor Faisal Humayun discussed in his Jan. 15 column, Ant Financial itself has many growth catalysts.
Ant will soon launch an initial public offering. Once Ant is publicly traded, the market, taking into account the higher value of BABA’s Ant Financial stake, could push Alibaba stock higher.
All these factors indicate that Alibaba could very well rise further in 2020. But how about the U.S.-China trade issue? Actually, that has less of an impact on BABA than some might think.
The Trade Dispute May Not Have Much of an Impact
In 2019, it seemed like the U.S.-China trade war was holding back Alibaba stock. After the countries reached a truce, the shares advanced. But according to University at Buffalo School of Management Professor Veljko Fotak, U.S.-China trade relations may not have much impact on Alibaba.
Fotak told InvestorPlace that “the trade war will not affect Alibaba in a dramatic manner.” Very little of Alibaba’s revenue comes from the U.S. And most of Alibaba’s products come from within China. To further convey his point, Fotak pointed out that Alibaba’s stock didn’t rally after the signing of “phase one” of the trade deal. Instead, the shares dipped 0.4%, or as he said, they had a “non-reaction.”
Fotak also noted that Alibaba’s growth strategy does not rely much on the U.S. When it comes to overseas markets, BABA is primarily focused on Southeast Asia and India. Its secondary area of focus overseas is Europe. In short, investors’ perception of the trade war’s impact on BABA may not match up with reality.
So if the trade war is not a big factor for BABA, could worries about the issue have caused Alibaba stock to become undervalued? The shares now trade for 30.8 times analysts’ average earnings per share estimate for the company’s current fiscal year which ends in March. But with analysts, on average, expecting the company’s earnings per share to increase 22.7% in its upcoming fiscal year, Alibaba could rise further, even if its forward P/E multiple stays the same.
Based on the average FY21 EPS estimate of $9.07 and the current 30.8 earnings multiple, the shares would be worth $279 share, about 25% above the stock’s current price.
The Bottom Line on BABA
The valuation of Alibaba stock may be getting stretched. But since the company has multiple growth catalysts, it doesn’t look smart to bet against it just yet. As long as global economic growth continues, expect Alibaba to set new highs in 2020.
What if the global economy takes a breather? Alibaba is well-capitalized enough to weather a potential storm. Its recent Hong Kong IPO bolstered its cash reserves. For the time being, Alibaba stock remains a buy. The shares are richly priced, but they could head higher in 2020.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.