Tread Carefully, but Continued Growth Makes Alibaba Stock a Buy

Ahead of earnings, should you buy Alibaba (NYSE:BABA)? The novel coronavirus took some wind out of the company, but China’s in recovery mode. Growth remains in motion for the company’s e-commerce and cloud computing businesses. In short, there’s good reason why investors have bid Alibaba stock higher in recent weeks.

Tread Carefully, but Continued Growth Makes Alibaba Stock a Buy

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Granted, shares haven’t retraced prior highs set in January. Yet, with shares still below the high-water mark, now may be the time to buy. As China puts coronavirus in the rear-view mirror, shares could continue to bounce back.

Recent backlash over U.S.-listed Chinese stocks may give you pause. The risks of the U.S.-China trade war resuming is another key risk. But, with these factors priced into shares, don’t let this keep you away from this opportunity.

Let’s dive in, and see why Alibaba stock could be a strong buy before earnings.

E-Commerce, Cloud Growth and Alibaba Stock

As our own Matt McCall recently wrote, “investors are flowing into what’s working.” In other words, shares in hard-hit airline and retail stocks remain far below prior highs. But, coronavirus hasn’t really affected big tech stocks. As a result, these names have recovered faster than the overall market.

But that’s not the only thing working in this company’s favor. Consider the fact that China is largely over the pandemic.

As D.A. Davidson’s Gil Luria recently put it, “China is the only big country that is really past the peak of the pandemic.” While the Western world struggles to “return to normal,” China’s in full recovery mode.

This bodes well for Alibaba’s continued growth in their e-commerce and cloud computing businesses. In short, shares could continue moving back to prior highs (around $230 per share). And beyond.

Over the next fiscal year (ending March), analyst consensus calls for sales to grow from $71.2 billion to $92.5 billion. In other words, nearly 30% revenue growth.

Earnings could climb 20% in the next year, from $7.01 per share, to $8.45 per share. Yes, earnings growth may be slower than revenue growth. But, like it’s American counterpart, Amazon (NASDAQ:AMZN), you aren’t buying Alibaba for its current earnings.

Instead, you are buying for the company’s ability to scale into a much larger business down the road. Once growth takes a breather, the company can “cash the check.” That is to say, increase margins, resulting in a highly profitable business.

Yet, despite these strong points, there are some concerns to keep in mind. While largely priced into shares, they are still caveats to consider.

Geopolitical Risks Holding Back Valuation

As InvestorPlace’s Mark Hake discussed May 19, Amazon stock has moved much higher year-to-date compared to Alibaba. Why is that the case? There are two key reasons why investors have been afraid to bid up this stock in the same way they’ve done with its American counterpart.

Firstly, there are valid concerns over a reinvigorated U.S.-China trade war. As you may remember from last year, the trade war was bad news for this stock. Shares largely tread water for most of 2019, only moving higher once the battle cooled down in December 2019.

Secondly, the recent backlash over US-listed Chinese stocks. After the Luckin Coffee (NASDAQ:LK) fiasco, there’s great concern over the reliability of Chinese financial statements. As a result, some are calling for stricter regulations.

Proposed legislation moving through the U.S. Congress could mean a delisting of Chinese companies from U.S.-based stock exchanges. Even if names like Alibaba aren’t forced out, the hassle of complying with new laws may compel them to de-list voluntarily.

The specter of increased U.S. regulation could explain the company’s 2019 Hong Kong IPO. With this new listing, the company has less of a need to continue trading in the U.S.

In short, it makes perfect sense why shares remain “cheap” relative to Amazon. Alibaba stock trades for a forward price-to-earnings (P/E) ratio of 31. Amazon shares sport a forward P/E of 121.4.

Yet, this valuation discrepancy may be an opportunity, not a red flag. Geopolitical risks could be priced into shares. In other words, today’s valuation may be a strong entry point.

Despite Risks, Consider Alibaba Stock a Buy

Weakening US-China relations may be holding this stock back. But, don’t let these concerns scare you away. With China in recovery mode, the company’s growth prospects in e-commerce and cloud computing remain in motion.

Earnings hit the street pre-market on May 22. If the company meets expectations, shares could climb further. Tread carefully due to the geopolitical risks. But consider Alibaba stock a buy at today’s prices.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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