Chinese e-commerce and tech giant Alibaba (NYSE:BABA) has been making headlines over the past several weeks. While Alibaba has come under heightened regulatory scrutiny in China, BABA stock has suffered.
In early April, markets got the result of the antitrust investigation against the company. Authorities in China, namely the State Administration for Market Regulation (SAMR), found Alibaba guilty of violating the country’s anti-monopoly law.
As a result, the group has been fined a record $2.8 billion. Most analysts do not expect this amount to affect the fundamentals or the capitalization of the company adversely.
BABA is essentially flat year-to-date, but it is off about 30% from October 2020’s $319.32 all-time high. The decline in the share price started when the initial public offering (IPO) of its fintech affiliate, Ant Group, was put on hold after Jack Ma voiced negative opinion of China’s state-backed banking system.
Over the past year, China’s Shenzhen Composite and the Shanghai Composite have returned close to 28% and 21%, respectively. However, both indices are now off the multi-year highs seen in early February. Therefore, as Alibaba gets ready to report earnings in May, market participants wonder whether it’s an opportune time to buy Chinese shares such as BABA stock.
Long-term investors with a two- to three-year time horizon may consider buying the dips, especially if the price declines toward $220. Here’s why.
Q4 Earnings and BABA Stock
In online shopping, Alibaba has around a billion global annual active consumers, including about 800 million consumers in China and 200 million outside China. Its cloud computing operations have also been growing steadily.
The company announced fiscal 2021 third-quarter results in early February. Revenue came at $33.88 billion, up 37% year-over-year (YoY). Non-GAAP net income was $9.07 billion, up 27% YoY. EPS was 42 cents, up 21% YoY. As of the end of 2021, free cash flow stood at $14.74 billion.
When Alibaba releases its earnings in the coming weeks, owners of BABA stock should pay attention to three main areas:
- Core commerce (BABA’s largest segment with 88% of revenue);
- Cloud computing (7% of revenue); and
- Digital media and entertainment (5% of revenue).
Investors are ready to put behind the recent regulatory headache and look forward to revenue increases in 2021. Meanwhile, the company is growing operations in health care services, too.
“Alibaba Cloud is committed to apply data intelligence to help doctors and nurses offer better healthcare services to patients and ultimately save more lives,” management said in a statement.
Alibaba is also putting resources into the Internet of Things (IoT) with applications in healthcare, including the digitization of medical information and processes.
Finally, Alibaba has a controlling interest in Alibaba Health Information Technology (OTCMKTS:ALBHF), which provides digital solutions for the medical and pharmaceutical industry.
It has partnered with Servier China and Merck (NYSE:MRK) to offer consumers and patients better access to healthcare in recent months. We should expect to hear more from the company regarding these new initiatives.
The Bottom Line on BABA Stock
Alibaba stock’s forward price-earnings and price-sales ratios are 20.28 and 6.38, respectively. In the coming weeks, a potential decline toward $220 or even below would improve the margin of safety for buy-and-hold investors.
Despite the recent weakness in price, BABA stock should continue to create shareholder value in the coming quarters. I’d expect the share price to go over $300 once again in a few years.
However, traders with a short-term horizon should remember that there might be further choppiness and even profit-taking in BABA stock. The daily volatility of the stock is high, giving it a wide trading range. Day traders should proceed with caution.
Those investors who are bullish on China but do not want to commit capital to BABA stock only could also consider buying an exchange-traded fund (ETF). Examples would include the Invesco Golden Dragon China ETF (NASDAQ:PGJ), the KraneShares CSI China Internet ETF (NYSEARCA:KWEB), or the SPDR S&P China ETF (NYSEARCA:GXC).
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.