The novel coronavirus outbreak started in China, and recovery from the pandemic has already continues to take place. It may take a long time to fully rebound from the economic impact of the coronavirus. In the meantime, though, there are only a handful of businesses that will benefit — including e-commerce and cloud services. Alibaba (NYSE:BABA) is China’s leader in both markets, and therefore, Alibaba stock should be performing much better than it has.
The Numbers
IDC recently estimated Alibaba controls 47% of China’s Infrastructure-as-a-Service (IaaS) cloud market. As of last year, Alibaba controlled about 55% of China’s e-commerce market share, by far the largest share of any company.
Moreover, CNBC analyst Jim Cramer addressed the impact COVID-19 has had on cloud services this week.
“The coronavirus has created a magnificent bull market in cloud computing,” Cramer said. At the time, he was talking specifically about Microsoft (NASDAQ:MSFT).
Additionally, The media loves to call Alibaba the “Chinese Amazon,” and for good reason. That said, Bank of America analyst Justin Post recently touched on the prospects for Amazon (NASDAQ:AMZN) due to coronavirus.
“Like Target, we anticipate an uptick in Amazon orders given less mall/store shopping, along with rapid category mix shifts & inventory disruptions that will create cost inefficiencies in the system,” Post said.
Alibaba Commentary
It’s difficult to anticipate exactly what kind of numbers Alibaba will put up in the first two quarters of 2020 given the COVID-19 chaos. Overall, though, investors should certainly prepare for some disappointment. Alibaba management said retail and restaurant numbers will be down, and travel will also take a big hit. At the same time, grocery sales and delivery should get a boost — as well as cloud-based digital communication and video conferencing services.
In early March, Alibaba’s majority-owned Cainiao logistics company returned to pre-outbreak output levels. It’s Ele.me meal delivery service has also been up and running at full capacity since then.
Also, Alibaba e-commerce competitor JD.com (NASDAQ:JD) recently guided for 10% revenue growth in the first quarter of 2020. That guidance factors in the impact of the coronavirus.
Collectively, e-commerce and cloud services are robust businesses. Like any other company, Alibaba’s business will take a hit from COVID-19, as will Amazon and Microsoft. However, long-term investors seem to be seeing the big picture with Amazon and Microsoft. Year-to-date, AMZN stock is up nearly 6% while MSFT stock is up just 2%. Meanwhile, Alibaba stock is down 8.3% and JD stock is up 17.3% over the same period.
Long-Term Outlook For Alibaba Stock
Even if Alibaba’s numbers take a hit in the first quarter, there is a silver lining to this outbreak. The quarantines may help speed up the long-term digital transformation of the global economy.
Stubborn consumers may be forced to try Alibaba’s delivery, grocery and video conferencing services for the first time. And once they get to experience these services and get familiar with them, they may stay with them.
At the same time, traditional brick-and-mortar competition is getting crushed. Sure, Alibaba’s retail sales may be negatively impacted in the first quarter. But it seems likely that the company is gaining significant market share from physical retailers — many of which closed up shop during the outbreak. Some may not survive the ordeal at all.
Moreover, BABA stock currently touts a forward earnings multiple of about 22. So for a company that reported 38% revenue growth and 58% net income growth last quarter, that is an extremely cheap multiple. Add in the backing of the Chinese government and the fact that Alibaba stock is exposed to several of the biggest secular growth trends in technology, and Alibaba looks like an easy buy at current prices.
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, he was long BABA stock.
