Alibaba (NYSE:BABA), China’s leading “Cloud Emperor,” has had a horrible, terrible, no-good and very bad year. But having gone through a fire that its peers still face, BABA stock looks like a buy again.
The e-commerce giant’s bad year was largely driven by the Chinese government. Alibaba has been slapped with fines, seen its leader humbled and watched its most promising subsidiary have its wings clipped. But investors who may have missed the boat now have an appealing entry point into BABA stock.
The BABA Stock Buy Signal
Since falling below $210 per share on June 16, Alibaba stock has been on fire in a good way. Shares are up 8% in just two weeks.
The stock still looks dirt cheap. It has a market capitalization of $615 billion, which is less than 6 times last fiscal year’s revenue of $109 billion.
But Alibaba is not a retailer in the way Amazon (NASDAQ:AMZN) is. It brings 20% of its revenue to the net income line. Additionally, its trailing price to earnings (P/E) ratio is now just 27 compared to Amazon’s 65. This is despite Alibaba’s 41% growth in revenue last year, while Amazon grew “just” 37%.
Alibaba’s “asset light” business model makes it more like Microsoft (NASDAQ:MSFT), whose P/E ratio is 37. Like Microsoft, it has a lot of cash on the books — 616 billion HKD, to be exact. That’s roughly $80 billion.
I looked at Alibaba in May, having sold my own holdings at $236 per share. I concluded it was a good time to buy at $211, and I was right — although I wish I had followed through in my own portfolio.
The Pros and Cons of Alibaba
The risk to Alibaba from Chinese government policy is now minimal. Co-founder Jack Ma is laying low. His partner Joseph Tsai is stinging from his Brooklyn Nets’ loss in the NBA playoffs. The government seems more intent on taking down Alibaba’s rivals like JD.Com (NASDAQ:JD).
Some uncertainties remain, though. Anti-Chinese sentiment may have caused Bytedance, which owns TikTok, to leave Alibaba and start building its own cloud. President Joe Biden’s administration could also follow through on Former President Donald Trump’s threat to delist Chinese stocks.
Then there’s the possibility of a short squeeze. Some 12.5% of BABA stock’s American Depositary Receipts (ADRs), which are what trade in the U.S. in lieu of foreign stock, were being held short on June 25. Reddit noticed, and cheap stock with lots of shorts meant buy, buy, buy.
On a positive note, what has always interested me about Alibaba is its cloud. Alibaba isn’t just selling infrastructure or a platform. It offers a full suite of business and accounting software on its cloud.
It’s still investing there. Alibaba has announced it will spend $1 billion to support startups in Asia with its cloud.
The Bottom Line on BABA Stock
Alibaba is still dirt cheap and its regulatory risks are now lower than those facing some American Cloud Czars.
My concern is that Alibaba should be investing more in cloud data centers and less in brick-and-mortar retailing. Its decision to help bail out mall developer Suning is seen as a positive by most analysts, but I see it as negative. Its relative success with new TV shows will also strain the balance sheet.
I would rather see Alibaba focus on things like supply chains and helping more health professionals get online. But all that said, the stock is cheap. You can buy it.
On the date of publication, Dana Blankenhorn held LONG positions in AMZN, JD and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.