Alibaba (NYSE:BABA) stock has been in a sustained downtrend.
From 52-week highs of $319, the stock has declined by more than 40% to current levels of nearing $188.
However, it seems to me that the worst is over for the stock. Even with regulatory concerns, BABA stock looks attractive at a forward price-to-earnings ratio of 20.4.
An important point to note is that the private sector is the growth triggering sector of China’s economy.
Regulatory headwinds create an uncertain business environment and can impact GDP growth. Therefore, it seems very likely that differences with regulators will be ironed out.
In a recent report, Miller Value Partners claims that the company agreed to make the changes suggested by the government in addition to paying some fines. Alibaba has also agreed to partner with the government in acquiring Suning.com, a struggling national retailer.
The report suggests that the government’s focus has shifted elsewhere.
Regulatory headwinds aside, core business growth remains healthy for Alibaba. The markets are likely to shift focus to company-specific fundamentals. The upside for BABA stock, therefore, seems imminent in the coming quarters.
A Closer Look at BABA Stock
Alibaba recently reported first-quarter results for 2022. The company missed on revenue but beat earnings per share estimates. Overall, I believe that the numbers were good and the outlook remains positive.
A concern in the results was the deceleration of growth in the cloud business. For Q1 2022, the cloud business revenue increased by 29% on a year-on-year basis. The decline was due to one overseas cloud customer that stopped using the company’s services on local regulatory requirements. Leaving that aside, the company’s cloud business saw y-o-y growth of 40%.
It’s also worth noting that the cloud business reported positive EBITDA for the second consecutive quarter.
It’s very likely that EBITDA margin will expand in the coming years. I believe that the cloud business will be a cash cow that’s similar to the core commerce business in the next five years.
My point is backed by the fact that the company has pledged to invest $28 billion in the cloud business over the next three years. This investment is likely to translate into sustained top-line growth and healthy cash flows.
In the core commerce business, Alibaba reported y-o-y revenue growth of 35%. There are two reasons to believe that the core commerce business growth will remain robust.
First and foremost, Alibaba has a strong presence in Southeast Asia, which is another big market. For Q1 2022, the company’s international commerce retail growth was 54%. This was primarily driven by Lazada making inroads in the Southeast Asian market.
Further, within China, the company is increasingly focused on expansion in tier two and tier three cities. This is likely to ensure that growth remains strong in the world’s biggest e-commerce market.
Strong Fundamentals To Drive Growth
As of June 2021, Alibaba reported cash and equivalents of $72.9 billion. Additionally, the company reported free cash flow of $3.2 billion for the quarter. This would imply an annualized FCF of $12 billion.
Alibaba is well-positioned from a financial perspective. The company recently announced an expansion of its share repurchase program to $15 billion.
Strong financial flexibility will also allow Alibaba to invest aggressively in growth and innovation. Once the company overcomes the regulatory headwinds, it’s likely that capital investments will accelerate further.
Concluding Views
Selling in BABA stock seems to be overdone with the company continuing to report strong business growth. The company itself seems to be closer to sorting differences with the regulators. This will allow renewed focus on the core business with greater regulatory clarity.
It’s said that the best time a buy a stock is when fear is the dominant sentiment. This holds true for BABA stock. I would not be surprised if the stock is an outperformer in the next 12-months.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
