Alibaba (NYSE:BABA) stock is probably a good buy at the current price level, despite the risks associated with the coronavirus outbreak.
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Although there’s no question that Alibaba, a Chinese e-commerce merchant, will take a sales hit this quarter, there are already signs that the worst is over. Chinese companies are starting to reopen and send their employees back to work.
Alibaba is The Major Online Seller In China
Keep in mind that Alibaba sells two-thirds of all goods sold online in China. So it has long been an indicator for the overall health of the country’s economy.
Second, Chinese habits of ordering more goods online are on trend to become more ingrained, especially in regions that have not been early adopters when it comes to electronic retail.
For example, 60% of the company’s new active customers in the past year came from less developed areas or Tier 3 to Tier 5 Chinese cities. The isolation from self-quarantine will spur further e-commerce ordering and fulfillment in these regional cities.
Granted, Alibaba has said its Tmall and Taobao retail businesses, food delivery and other consumer units will shrink in the first three months of 2020. These are responsible for about 57 percent of overall revenues in Q4. The Financial Times recently gave examples of companies impacted by the business slowdown.
But the fact remains that this is not going to be a long-term headwind for the company. As a result, Alibaba stock looks fairly cheap right now.
Alibaba Stock Is Cheap Here
Lastly, Alibaba produced very strong results on February 13 for its fourth quarter. In fact, the results were very impressive. Revenue was up 38% year-over-year. Non-GAAP net income was up 56% and free cash flow was up 52%. The underlying trend is very strong.
So the dampening economic effect of the coronavirus outbreak will hurt sales and cash flow, but shouldn’t have lasting implications.
For example, based on last years’ earnings, Alibaba stock trades at just 20 times the annualized run rate of earnings of $2.64 per share in Q4.
So even if we deduct 25% from that level of earnings due to the outbreak, Alibaba’s annualized earnings are $7.83 per share. At today’s price of $208, Alibaba stock is trading for only 26.5 times earnings.
That’s very cheap for a company with such clear earnings power.
What Investors Should Do With Alibaba Stock
At the end of January, Barron’s published a story that Alibaba stock looks like a “buy” on coronavirus fears. This was before Alibaba’s profit warning and results on February 13. But most of the points that article made are still intact.
Investors might begin to nibble on Alibaba stock at these levels. The point of highest uncertainty is usually the best time to buy a stock that is down significantly with such earnings power.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.
