Alibaba (NYSE:BABA) stock is down 28% year-to-date, and it is even worse if we look back a few months further back. This is a surprising situation because the company is healthier than ever.
How else can they muster more than $100 billion in sales in one day on 11/11? Nevertheless, that’s the story on the chart for BABA stock and the investors are in pain.
Investors would have to look back five years to see a positive return. And today’s conclusion is that over the long term, this is still a viable bullish thesis. But first, the Chinese equities need to come out from under the regulatory cloud.
This morning Baidu (NASDAQ:BIDU) reported earnings. The metrics were solid on the sales growth, yet the stock is so far barely budging. BABA will also report its quarter this week, so it’s a binary outcome there too.
Earnings Reports Are Temporary Uncertainties
Normally I don’t take new positions into a stock that’s about to report earnings. The investor reactions are more from emotions than facts. The predominant headlines are about performance to estimates. Expectations are not reliable because they are mere opinions. Eventually the price action will take into account the actual metrics, but not on the headlines.
In BABA’s case, much of the froth has already fallen off the price. Alibaba stock has been falling this year, but its problems started in 2020. Antagonistic comments from co-founder Jack Ma about the Chinese financial system triggered a mess. But in reality, the axe was likely coming down anyway.
BABA stock after losing half its value from the all-time highs makes for a better long than short. If markets are higher in the future, I am confident that it will be too. It has no equal in how much revenue it can produce.
Case in point, the record pace it logged on 11/11. That is an unbelievable feat that speaks to the company’s potential. Anyone shorting this with conviction may be in for a world of hurt.
I am not alone in this opinion because the Wall Street experts also agree. According to Yahoo Finance, most rate BABA stock as a “buy” still. In fact, their average price target there is still 45% higher than current value. They see the potential and are merely waiting for the recovery rally. Similar metrics exist for BIDU and JD.com (NASDAQ:JD).
BABA Stock Is a Bargain
Statistically, Alibaba stock now is dirt cheap. It has a price-to-earnings ratio of 20, which is 25% cheaper than Apple (NASDAQ:AAPL) to name one. Keep in mind that BABA grows much faster too. That is why now it has almost half of its valuation in 2018. Their revenues tripled in four years and grew almost 10 times in seven.
Clearly there is a disconnect between perception and reality. Onus is on management now to change the talking points. The business model remains intact, as I am sure the earnings will reflect. And as long as the political threats don’t escalate, the bulls will step back into it.
BABA wasn’t alone with this sad predicament this year. The whole Chinese equity market was also hurting. None of the leading tech companies there averted the beat-downs.
JD.com and Baidu investors also suffered heavy losses. For the last two weeks they are showing signs of life, but I am still wary. I will remain optimistic on them in the long run. But for now, I will keep my guard up.
The reversion trade will be profitable but I would prefer to be long the U.S. markets instead. If BABA stock is rallying then odds are U.S. tech companies are too. Whatever investors decide, they should leave room for error. The stock is still facing headline threats from earnings and politics.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.