In January, shares of Chinese e-commerce leader Alibaba (NYSE:BABA) touched an all-time high. Since then, however, Alibaba stock has declined 18%.
That decline might seem somewhat logical. BABA stock started fading as the coronavirus from China spread in its home market. Pandemic fears followed a trade war that still hasn’t been completely resolved, and which pressured economic growth in mainland China.
But investors need to remember three things. First, as I’ve argued repeatedly of late, the impact of the coronavirus will fade. The world economy, backed by technological innovation, will recover and return to impressive growth.
Second, China is starting to get the coronavirus under control. Apple (NASDAQ:AAPL) has reopened all of its stores in the country. Life there is getting back to normal — as it thankfully will elsewhere in the world at some point.
And finally, Alibaba stock was too cheap even at the highs. This is the best online retailer in one of the world’s two most populous countries. Its growth is mind-boggling given its size — and yet, the market values BABA stock almost as if it were just another company.
Overall, investors willing to take a long-term view in this market have a number of quality names to choose from. That said, though, Alibaba stock should be near the top of the list.
Take a Step Back
Many investors know Alibaba as basically the Amazon (NASDAQ:AMZN) of China, even though that’s an imperfect comparison. And I can’t help but wonder if that simplistic comparison scares some investors away from BABA stock.
After all, AMZN stock long has had a reputation of its shares being “too expensive”. That’s not an opinion I’ve held, but investors focusing on Amazon’s sky-high earnings multiples have tended to dismiss the stock.
The Chinese market, too, turns off some investors. For years now, China bears have predicted a so-called “hard landing” in that country where the economy heads into recession — or worse. Those bears haven’t let up, despite their dire predictions never coming to pass. The same, ironically, is true for Amazon.
However, China’s economy has shown impressive resilience over the past fifteen months. And Alibaba stock, at least from a fundamental perspective, is no AMZN. The stock trades at just 28 times the fiscal year 2020 (ending March) consensus earnings per share estimate. Moreover, those estimates include some impact in the fiscal fourth quarter from coronavirus-related disruption and shipping delays.
Despite those impacts, consensus still suggests 29% year-over-year earnings growth for FY2020. Wall Street is looking for another 20%-plus in FY2021, with revenue rising over 30%.
Even in this plunging market, there aren’t U.S. stocks that combine that kind of growth with that kind of valuation. There are few, if any, such stocks anywhere in the world.
And so it’s exceedingly difficult to argue right now that Alibaba stock is too expensive. It was difficult to make that case at January highs, too. BABA then traded at a bit over 30 times earnings — which didn’t incorporate its growth prospects, either.
Major Drivers for Alibaba Stock
Some investors may also see Alibaba as “only” a retailer. That, too, is inaccurate.
Like U.S. tech titans Amazon and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), Alibaba is reinvesting the profits from its core business into efforts that will drive enormous long-term growth.
In Asia, Alibaba is already the leader in cloud. The company has plowed billions of dollars into artificial intelligence, and the massive amounts of data generated by its Taobao and Tmall marketplaces gives it a huge edge in that growing field. Alibaba even has its own version of Amazon’s Alexa, named Alime.
Subsidiary Alipay, meanwhile, is one of the leaders in Chinese payments — with usage that goes well beyond the Alibaba platform.
Alibaba provides exposure to the megatrends that are going to drive global growth this decade and beyond. It’s not just a retailer. As it expands across Asia and beyond, it’s not even just a China play. It’s one of the best tech companies in the world, but it’s certainly not priced like it.
Buy the Dip in BABA Stock
The fact that Alibaba stock saw a short-term selloff isn’t necessarily surprising. But in context, a 18% decline isn’t all that steep. Certainly, it could have been much worse — and has been for other Big Tech stocks. AMZN is down 19% from its highs. while GOOG has dropped nearly 25%.
A 4.8% rally in Alibaba stock on Friday suggests that investors are again seeing value. It could even signal the end of the selloff in BABA.
But however the stock trades in the short term, the long-term case here is exceedingly attractive. There aren’t many better companies out there than Alibaba, and the valuation at this level is only an added bonus.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
