Alibaba (NYSE:BABA) stock popped in mid-August after the Chinese technology company reported first quarter, fiscal 2021 numbers which breezed passed expectations. The performance largely confirmed that Alibaba stock has put the novel coronavirus pandemic in the rear-view mirror.
BABA stock traded as high as $268 on the news – a level that nearly marks an all time high for the e-commerce and cloud computing giant.
Investors should get used to this.
Alibaba stock is going to keep making new all-time highs over the next several months because Alibaba’s business is on fire and the stock remains discounted relative to the company’s long-term growth potential.
So I say stick with the rally in BABA stock. The next stop for shares is $300. Here’s a deeper look.
Alibaba Posts Strong Earnings
Alibaba’s first-quarter earnings report was very strong, and broadly confirmed that this company’s business momentum today remains as vigorous as ever.
The headline numbers were impressive. Active customers rose 10%. Revenues rose 34%. Profit margins did compress by 126 basis points. That’s less than the compression we saw in the previous quarter, and all signs point to margin stabilization going forward. Net profits, meanwhile, still rose 28% despite that compression.
More importantly, though, the underlying trends are favorable.
Management said that its core Chinese commerce business fully recovered to pre-Covid-19 levels, as consumer confidence and spending bounced back sharply. Cloud computing revenues rose 59% in the quarter, amid a broad enterprise shift toward virtualization and hybrid work environments.
The company’s physical retail grocery chain, Freeshippo, continues to ramp as a go-to, next-gen omni-channel grocer in China, with 60% of orders coming from the online channel in the quarter. Ele.me – Alibaba’s food delivery arm – returned to growth in April, and ended the quarter with 30% merchant growth. The logistics business, Cainiao, gained traction in the quarter. On the last-mile front, Cainaio Post’s urban-focused, self pick-up solutions recorded over 100% growth in average daily package volume.
International expansion efforts continue to go well, too. Lazada – the company’s Southeast Asian e-commerce platform – grew orders by over 100% in the quarter. This shows that Alibaba is successfully leveraging its expertise to replicate its China success in other markets.
All in all, it was great quarter wherein most of Alibaba’s core businesses got back on track. So long as those businesses remain on track, the future is bright for the company and Alibaba stock.
Discounted Alibaba Stock
For years, Alibaba stock has traded at a huge discount to the company’s favorable long-term profit growth prospects.
Even with the stock at all time highs, that remains true.
Alibaba is at the epicenter of the Chinese digital economic explosion. That explosion may moderate in coming years, but it’s not going to disappear anytime soon. There are simply too many people in China – all of whom are urbanizing, digitizing and joining an increasingly Westernized middle class. China’s digital economic expansion won’t slow by much in the 2020s.
Alibaba, with its multiple market-leading digital properties than span across e-commerce, logistics and cloud, will remain the heart of China’s digital economy.
As China’s digital economy continues to expand, Alibaba will sustain robust growth. I realistically see the company growing revenues at a 15% compounded annual growth rate into 2030.
Profit margins will stabilize as entry into lower-margin businesses like international commerce, is offset by increased scale in maturing businesses like cloud. Profits, therefore, should also grow at a ~15% compounded annual growth rate into 2030.
Assuming so, my modeling suggests that $30 in earnings per share is doable for Alibaba by the end of the decade.
Based on a 20-times forward earnings multiple, that implies a 2029 price target for BABA stock of $600. Discounted back by 8.5% per year, that equates to a 2021 price target of ~$310.
Thus, over the next ~12 months, I see this stock rising another 20%.
The Bottom Line on Alibaba
Alibaba has put the Covid-19 pandemic in the rear-view mirror. The company is back to firing on all cylinders. And the long-term profit growth prospects have never looked better.
At the same time, the company’s stock continues to trade at a discounted valuation.
That’s a winning combination. So stick with Alibaba stock. This one is only going higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not own a position in any of the aforementioned securities.