After reaching $230, Alibaba (NYSE:BABA) stock quickly dropped to $176 on fears of the coronavirus from China. But during the past week or so, things have been looking much better for Alibaba. Note that the shares have since bounced back to $189, putting its market capitalization at roughly $500 billion.
It seems likely that China has not been forthcoming with its infection and death rates. But it does look like the government has been able to flatten the curve of coronavirus patients because of the draconian actions it took in the country’s Hubei province.
The result is that China’s massive economy is starting to come back online. Its manufacturing purchasing managers index spiked to 52 in March, up from 35.7 in February. It is also notable that companies like Nike (NYSE:NKE), Starbucks (NASDAQ:SBUX) and Apple (NASDAQ:AAPL) have been reopening their stores in China.
So what about Alibaba stock? Is it a buy now? I think it is. Here are three reasons why I hold that view.
E-Commerce
In the fourth quarter, Alibaba’s revenues jumped by an impressive 38% to $23.2 billion, and its operating cash flows came in at $13.9 billion. In Q1, the company’s growth may have stayed resilient. With brick-and-mortar stores shut down, there was little choice for consumers but to make e-commerce purchases.
We already got a glimpse of that phenomenon from Nike’s results. In its last reported quarter, the company ‘s online sales in China offset most of the steep sales declines of its retail outlets in the country.
Alibaba is China’s dominant e-commerce platform. The number of active consumers on the company’s marketplaces came to a staggering 711 million last year.
It’s also important to note that China’s government has implemented aggressive monetary and fiscal policies. These policies should boost the e-commerce spending of the country’s consumers.
Then there are the long-term drivers of BABA stock. For example, the number of middle class citizens in China is expected to reach 600 million by 2022, and its e-commerce market is expected to be worth $839.54 billion by 2021.
The Cloud
The coronavirus is likely to be a catalyst for Alibaba’s cloud business. After all, the technology allows for collaboration by and the monitoring of remote workforces. But it is also essential for allowing companies to leverage e-commerce when their own brick-and-mortar operations are closed.
Consider that – in just a few years – Alibaba has built a large cloud business, which has benefited from the company’s large ecosystem of partners as well as innovations like artificial intelligence. And the unit’s growth has been particularly strong. In the company’s last reported quarter, its revenue soared 62% to $1.5 billion.
Showing the strength of the company’s cloud platform, during the 11.11 Global Festival, the technology actually processed about 544,000 orders per second at peak levels and handled about 970 petabytes of data.
The Valuation of BABA Stock
The valuation of the shares is reasonable. Keep in mind that the forward price-earnings ratio of the shares is about 23. To put that into perspective, Amazon.com’s (NASDAQ:AMZN) forward P/E ratio is about 66.
As for Wall Street analysts, they remain upbeat on Alibaba stock, too, as they, on average, expect the company’s revenue to rise about 32% this year. But that may be too conservative, especially since China has been able to get back on track quickly, while the company is the dominant player in non-cyclical growth markets like e-commerce and cloud computing.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
