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Alibaba’s Coronavirus Warnings Create a Buying Opportunity

CEO Daniel Zhang warns of a "black swan" event, but Alibaba stock is still a great long-term buy

As China’s largest e-commerce company, it’s not surprising that Alibaba (NYSE:BABA) is concerned about the coronavirus.

Alibaba Stock Has the Growth, but Do Investors Have the Patience?
Source: Nopparat Khokthong / Shutterstock.com

Before the bell on Feb. 13, the company reported fiscal third-quarter earnings of $2.61 a share on sales of $23.2 billion. Those figures soundly beat Wall Street estimates calling for earnings of $2.22 on revenue of $22.5 billion. However, analysts know the coronavirus is a credible issue facing any company doing business in the world’s second-largest economy.

“In response to the coronavirus, we mobilized Alibaba ecosystem’s powerful forces of commerce and technology to fully support the fight against the outbreak, ensure supply of daily necessities for our communities and introduced practical relief measures for our merchants,” Alibaba CEO Daniel Zhang said in a statement.

The virus, and how Beijing reacts to it, is beyond Alibaba’s control. Beijing’s heavy footprint in the day-to-day workings of the Chinese economy may be compounding markets’ adverse reaction to the “Wuhan virus” because there are growing doubts about just how accurate the government’s data are.

This is what is available for public consumption. As of Feb. 18 confirmed cases jumped to 73,000 and the fatality rate spiked to almost 1,900.

Hope Still Glimmers

Over the past month — approximately since the first coronavirus case emerged — Alibaba stock is lower by 3.9%. That’s about equal to the 4% shed by the MSCI China Index over the same period. Alibaba accounts for over 17% of that benchmark.

That’s a decent performance for Alibaba stock against the backdrop of a deadly outbreak, but the near-term outlook for the shares is probably lower. However, with consensus building that Alibaba, JD.com (NASDAQ:JD), iQiyi (NASDAQ:IQ) and other China internet plays are buy-the-dip candidates, a bit more downside for the e-commerce giant may work in investors’ favor. The company has been taking steps that could prove beneficial once the virus is contained, notes Citi analyst Alicia Yap.

“For example, Alibaba has demonstrated its socially responsible stripes, temporarily waiving commission fees for local services merchants on the Tmall site — a move that could help strengthen its overall platform as China recovers,” reports Barron’s, citing the analyst.

Another element to consider, particularly at a time when market observers are growing skeptical about China’s ability to grow GDP by at least 6% this year, is just how important the internet is to the country’s efforts to bolster internal consumption.

“Internet plays an important role in this transformation,” Yuan Can reported. “With the help of Internet, resources are more accessible to ordinary people.”

So while BABA isn’t a state-owned enterprise, Beijing is invested in its success.

The Bottom Line on Alibaba Stock

Zhang himself called the coronavirus a “black swan event.” A comment like that from a CEO is sure to dissuade some investors — and the executive was open that results for the current quarter will not be strong.

Still, this is a company that’s set to deliver 20%-plus revenue growth for the next several years. It’s one that has a cloud computing business that posted revenue growth of 62% in the most recent quarter. And it’s one that owns stakes in firms that are worth tens of billions of dollars and are growing at exponential rates themselves.

Investors can get all of that for 20 times free cash flow and 9.3 times sales. Those ratios imply Alibaba is offering growth at a very reasonable price.

As of this writing, Todd Shriber did not own any of the aforementioned securities. He has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/alibaba-stock-coronavirus-warnings-buying-opportunity/.

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