Alibaba (NYSE:BABA) stock has seen a 13% increase over the last month — a sign of an improved outlook on the Chinese consumer. Alibaba stock boasts a market capitalization of about $600 billion, putting it at about half the size of Amazon (NASDAQ:AMZN), which suggests that the Amazon of China has room to run by serving the worlds second-largest economy.
This is to be expected. In the March Q1 2020 full fiscal year 2020 earnings call, CEO Daniel Zhang attributes Alibaba’s $1 trillion in gross merchandise volume to strong execution and scale.
I believe there is still room for growth, especially if Covid-19 continues to be an issue for traditional retailers. Zhang also suggested that as of March 9, they had fully recovered their sales before Covid-19.
Maggie Wu, Alibaba’s chief financial officer, also expressed confidence in light of the resilience they saw. Management expected the quarter ending March would be negative, but they produced 22% year-over-year revenue growth, and 19% year-over-year core commerce revenue growth.
With their broad approach of focusing on both the top and bottom line in their e-commerce, digital media and cloud computing segments, they expect to grow earnings by 30% this year.
Moving Forward And Upward
There is strong reason to believe that this trend was continued this week during their “6.18” sales special, where even Alibaba’s peer, JD.com (NASDAQ:JD) said it had racked up 269.2 billion yuan of transactions, up 34% from the same time a year earlier and already surpassing 2019’s total.
After all, Alibaba’s 780 million customers include 85% of the Chinese population in developed areas and 40% of undeveloped areas.
Yet another good sign that Alibaba’s stock is in a good position is the vote of confidence by those who know it best—its management. On June 17, Alibaba Cloud, the data intelligence unit of Alibaba Group, announced it would invest $283 million during the current fiscal year to “empower global partners and accelerate joint innovations in the post-pandemic era.”
Alibaba Stock Doubling Down
On the most recent earnings call, Wu went further to reconfirm its commitment to abiding by the U.S. Holding Foreign Companies Accountable Act, and is closely monitoring the bill.
There is an existing framework for facilitating audits. She reminded investors that Alibaba’s Financial Statements have been audited by PricewaterhouseCoopers Hong Kong since 1998, and they “hold itself to the highest standard of trust and transparency.”
We also need to look at the track record of a management team and their ability to deliver on guidance. On May 22 2020, the company announced quarterly earnings of $9.20 per share, a positive surprise of 50.9% above the consensus of $6.10.
Over the past four quarters, the company has reported four positive surprises. The average surprise for this period has been 27.6%. The company has executed very well, and has earned very much deserved benefit of the doubt that it can reach its 2020 and 2021 revenue goals.
Lastly, one needs to consider the technical indicators of Alibaba’s stock. Alibaba’s 50-day moving day is above it 200-day. As an additional comparison, E-commerce giant Amazon trades at a PEG ratio of 2.92 times, while Alibaba trades at 1.21 times; less than half, making it fairly undervalued in my opinion.
Navigating Geopolitical Landscape
One major challenge to Alibaba stock’s ascension to greatness are the geopolitical conflicts of its home country of China. I don’t anticipate trade tensions to result in any escalations in sanctions with the United States, given the proximity of the U.S. presidential election, although there are no guarantees.
China’s other conflict with India may result in nominal tariffs on about $8 billion to 10 billion dollars’ worth of goods. If these details are accounted for in the market value of Alibaba, along with potential future economic escalations, buying Alibaba is a risk worth taking.
Altogether, assuming accounting rules don’t cast a shadow over Alibaba’s stock categorically, it seems to be a good position to hold in a diversified portfolio, under any economic scenario.
As of the time of the writing of this article, Emmanuel Henson owned shares in Alibaba.