This week, Alibaba (NYSE: BABA) once again reported some mind-blowing growth numbers for its fiscal third quarter. But once again, negative headlines outside of the company’s control have weighed on Alibaba stock. Shares are down 4.6% overall in the past month due to concerns about the Wuhan coronavirus’ impact on the Chinese economy.
Despite the coronavirus fears, there are at least five good reasons long-term investors should be buying Alibaba stock following its earnings report.
1. Impressive Growth Numbers
The best place to start is with Alibaba’s growth numbers themselves. Adjusted earnings per share were $2.61 on revenue of $23.2 billion. Both numbers beat consensus analyst estimates of $2.22 and $22.4 billion, respectively. Net income was up 58% from a year ago. Revenue growth was 38%.
Cloud computing revenue was up 63% to a record $1.53 billion. The company added 18 million active retail marketplace customers, bringing its total up to 711 million. It also added 39 million mobile active users, bringing its total to 824 million. To keep some perspective, both those user counts are well more than double the total population of the U.S.
Alibaba’s growth has been as consistent as it has been impressive. Over the last eight quarters, revenue has grown 76%, 65%, 50%, 34%, 41%, 37%, 39% and 38%.
2. Limited Coronavirus Impact
For more than a year, Alibaba stock lagged on concerns surrounding the U.S. trade war with China. Once a phase one trade deal was announced in mid-December, Alibaba stock soared to new all-time highs. Unfortunately, the coronavirus outbreak started making headlines within days of the trade deal.
As predicted, Alibaba said the outbreak and its fallout is having a negative impact on its first-quarter business. Workers have been slow to return following the Lunar New Year holiday. As a result, management said Alibaba’s retail marketplace and local consumer services could even see negative revenue growth in the quarter.
While Alibaba doesn’t provide quarterly guidance, most analysts expect the coronavirus’ economic impact to be temporary. In fact, the S&P 500 hit new all-time highs this week, suggesting the market expects the coronavirus to be merely a temporary headwind.
3. China’s Impressive Economy
China’s economy has slowed in recent years, but it is still outpacing U.S. growth by a wide margin. In the fourth quarter of 2019, U.S. GDP grew by 2.1%. China’s GDP grew 6%. Even after factoring in the coronavirus impacts, economists are forecasting China’s GDP growth will be in the 5.5% to 5.9% range in 2020. That growth rate is nearly triple the 2% U.S. GDP growth rate the Federal Reserve is predicting for 2020.
As I stated earlier, not only is China’s economy outgrowing the U.S., its population is much larger. In other words, the ceiling for China’s economy in the long term is much higher than that of the U.S. economy.
4. Positive Analyst Commentary
Bank of America analyst Eddie Leung says Alibaba’s third-quarter numbers were impressive.
“BABA posted a solid quarterly result ahead of the virus outbreak, with sales slightly above consensus, inline gross margins amid revenue mix shift, and beating [operating margin expectations] on efficiency shown in new initiatives and a gradual increase in headcount,” Leung says.
Leung says the coronavirus is simply a temporary setback for Alibaba stock.
“We view the outbreak as a [near-term] event and do not expect it to be a drag to the company’s leading position in [e-commerce] and Cloud,” Leung says.
Leung cut his revenue growth forecast for the first half of 2020 from 27% to 17% due to the outbreak. However, he also reiterated his “buy” rating and raised his price target for Alibaba stock from $240 to $249.
5. The Long-Term Growth Thesis for Alibaba Stock
The best reason to buy Alibaba stock is because the company is positioning itself to be a Chinese tech and retail juggernaut for decades to come. Alibaba has long been compared to U.S. e-commerce and cloud services leader Amazon (NASDAQ: AMZN), and for good reason. However, the simple truth is that Alibaba’s e-commerce sales growth, cloud sales growth and overall revenue growth put Amazon’s to shame.
The businesses where Alibaba thrives, including online sales, cloud services, logistics platform services and digital banking, are all massive long-term growth markets. Yet despite Alibaba’s thriving secular growth businesses, Alibaba stock trades at an extremely reasonable 24.5 forward earnings multiple.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long BABA stock.
