Why It Makes Sense to Buy Alibaba Stock on Any Dip

Alibaba Group (NASDAQ:BABA) is China’s largest company by market cap with a current value of nearly $700 billion. And assuming current trends hold, there’s a solid chance that Alibaba stock becomes China’s first trillion-dollar company.

Alibaba (BABA) logo on the side of a glass-walled building.
Source: testing / Shutterstock.com

In a market that has favored tech giants, Alibaba stock has performed well in 2020. It sold off in January and dropped along with most of the rest of the global stock market in March.

But since then, it’s been off to the races.  BABA is up by nearly 70% from its March lows, even after taking into account the sell-off of the past few weeks.


Source: GuruFocus

American investors tend to define Chinese companies in comparison to their closest U.S. equivalent. That’s hard to do for Alibaba because it has several overlapping business lines, many of which have no U.S. equivalent.

Its core Alibaba.com is the largest online wholesale market for importers and exporters. Its Tmall site serves as a marketplace for major brands and retailers, functioning somewhat like an Amazon.com (NASDAQ:AMZN). Its Taobao site is fairly similar to eBay (NASDAQ:EBAY) in that it serves as a platform for smaller merchants to sell their wares.

And Alibaba Cloud can be thought of as the Amazon AWS of China. It’s the largest cloud services provider in the country and one of the largest in the world.

It’s an eclectic mix of businesses, but all are critical to the functioning of the modern, digital economy. And in a world economy still ravaged by Covid-19, that matters.

Alibaba Stock is a Growth Machine

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Source: GuruFocus

While the rise of Alibaba’s share price has been meteoric, it hasn’t been unjustified. The company’s revenues have nearly tripled since 2017, and analyst estimates compiled by research site GuruFocus show revenues doubling again by 2023.

These numbers may prove to be wide of the mark; only time will tell. And even if these estimates do end up being accurate, we shouldn’t expect Alibaba’s blistering revenue growth to continue forever.

That’s OK. Alibaba stock isn’t priced with the expectation of revenues exploding higher indefinitely. The price/sales ratio has actually been falling since 2017 and is today roughly half its old high.

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Source: GuruFocus

Now, a price-sales ratio over 9x isn’t cheap by any stretch of the imagination. As a comparison, Amazon.com trades at a P/S of 5.45x and Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) trades at a ratio 6.7x.

Alibaba is certainly priced more aggressively than its pricey American peers. But it’s still cheap by the standards of its own history.

What’s Next for Alibaba Stock?

Alibaba has more exposure to the “real economy” than you might think. Its focus on the import/export market put it at risk from a prolonged slowdown in trade or worsening relations with the West. But that’s OK. The bigger story with Alibaba is the growth in its cloud businesses and digital services.

I would also add that this isn’t Alibaba’s first crisis. Global trade collapsed during the 2008 meltdown and Great Recession that followed, and Alibaba managed to grow throughout that crisis. So, Alibaba should be able to handle whatever the post-Covid world throws at it.

Should tech stocks in general fall out of favor, you could expect a little weakness in Alibaba stock. Given how far and fast tech has run this year, that’s a real possibility.

But I would view any weakness as an opportunity to accumulate shares of one of the greatest growth stories of our time.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a Dallas-based registered investment adviser. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/why-it-makes-sense-to-buy-alibaba-stock-on-any-dip/.

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