Alibaba (NYSE:BABA) is the world’s largest retailer and e-commerce platform whose stock has more than tripled since its initial public offering price of $68 back in 2014. With the growth of its e-commerce and cloud platforms, it continues to gain traction among the juggernauts of the investing world. However, with the recent trade war between China and the U.S., the novel coronavirus and delisting fears for U.S.-listed Chinese stocks, Alibaba stock has been weighed down considerably.
The question on the minds of investors is whether Alibaba stock could successfully weather these headwinds? The short answer is yes. The concerns surrounding its potential delisting are far-fetched, considering the stark differences in the level of compliance it has shown with the U.S. Securities and Exchange Commission filing and audit rules compared to a company such as Luckin Coffee (NASDAQ:LK).
The trade war is a bit of a toss-up, but the situation has not reached its extremes, so Alibaba stock should be fine for the most part. Additionally, the company posted better than expected results in its most recent quarter, which suggests that it has proven to be resilient despite the crippling impact of the pandemic. Let’s look at some of these points in more detail to assess the company’s position.
Performance
Alibaba delivered better than expected results in its first quarter. Revenues grew by 35% to $72 billion, and so did net profits by 42% to $19.8 billion. The revenue increase is mainly driven by the growth in its domestic retail business and its cloud computing segment. Gross merchandising volumes crossed $1 trillion as more and more merchants flocked to its platforms to generate online sales. Cloud business revenues grew by 58% year over year, which was slightly down from the 62% growth in the previous quarter. Given that the company announced that it would be investing over $20 billion in its cloud sector in the coming years, I expect this trend to continue for the foreseeable future. It is expected that online shopping trends in the post-pandemic world will most certainly provide tailwinds to Alibaba’s stock.
Moreover, the company continues to revolutionize different areas of life in China, including its digital payments. The company’s management team recently confirmed that through Alipay, it is working with the Chinese Central Bank to launch a new digital currency. This could prove to be another feather in its cap as cashless economies become a reality.
Valuation
A lot of talk has gone on concerning Alibaba’s appropriate valuation. The table above shows the performance of the stock and its four main competitors in the online retail space. The price-to-earnings ratio for Alibaba is healthy, but it’s considerably lower than its ten-year median of 42. Its competitors have similar numbers as far as the P/E ratio is concerned, with Amazon (NASDAQ:AMZN) topping the list.
Perhaps a more useful metric to assess a company’s valuation is the PEG ratio, which incorporates the earnings growth rate. The PEG ratio for Alibaba stock is in line with its ten year median of 1.28. This suggests that the P/E ratio isn’t excessive at this point, the opposite of which is true for Amazon. The metric where Alibaba outshines its competitors is its FCF and revenue growth per share, which are more than two times Amazon’s numbers. According to CNN Business, analysts have a whopping median price target of $1,863.61 for Alibaba for the next 12 months, which is 751% higher than its current price.
Let us consider the discounted cash flow model to arrive at the company’s current price target. The figures used in the formula are based on analyst estimates. The formula is provided below:
FCF per share (1+G) / (Ke-G)
FCF per share= Free cash flow per share
G= Perpetuity growth rate
Ke= Cost of equity
=$19.69*(1+4%)/ (7.86%-4%)
= $531
Based on the calculation, there is a 144% upside to the stock at the current level. Therefore, it seems like an ideal time to grab the stock at a significant bargain.
Risks
There are a few risks that can potentially impact or have already impacted Alibaba’s stock. U.S.-China tensions have now spilled over into the Covid 19 pandemic. Until now, Alibaba has downplayed its effects on its core business, stating that cross-border transactions between the two countries handled by Alibaba are relatively low. Until things get extremely tense between the countries, I don’t expect a material impact on its share price.
The pandemic has hurt its top line, but overall, the company has proven to be resilient. With restrictions significantly loosened in China, the company is in for a stellar second quarter. Analysts estimate a 48% increase in the company’s earnings-per-share figure in the upcoming quarter.
Moreover, delisting fears cut short the stock’s expected rally after posting better than expected results. The U.S. Senate recently passed a bill targeting non-compliant Chinese companies listed in U.S. stock markets. I don’t feel that Alibaba needs to worry about that, as it fully complies with the rules laid down by the U.S. Securities and Exchange Commission. The company has also claimed that the U.S. Public Company Accounting Oversight Board is in touch with the big four accounting firms in China.
Bottom Line on Alibaba Stock
Investing in Alibaba’s stock essentially means investing in the cloud, digitization, e-commerce but, most importantly, China. Given the upside in its current price and its estimated growth for the next few years, the company presents a substantial investing opportunity. Although there are few political implications that it needs to be careful of, overall the skies are clear for the stock to blast off in the post-pandemic world.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above.
