Ignore the Bearish Noise and Stay Firm on Alibaba Stock

It was a forgettable 2021 for e-commerce giant Alibaba (NYSE:BABA). BABA stock shed over 55% of its value over the past 12 months, its worse performance in years. Being in the crosshairs of the Chinese Communist Party (CCP) government resulted in billion-dollar fines and the disappearance of its eccentric founder in Jack Ma.

Alibaba (BABA) logo on the side of a glass-walled building.
Source: testing / Shutterstock.com

All eyes are on the company’s third-quarter (Q3) results, releasing this week. With market confidence at a low ebb, the e-commerce company is likely to beat the relatively muted estimates. With such a steep drop in its price, BABA stock has never been more attractive. The stock trades at just 2.5 times forward sales, which is 72% lower than its five-year average.

Alibaba is investing for growth in its future and is looking to diversify its operations from its legacy business. Its revenues are growing rapidly, which is a testament to its robust business.

What to Expect From the Third Quarter

After multiple earnings revisions during the quarter, the market seems to be expecting little from Alibaba’s upcoming quarter.

The good news for BABA stockholders is that the massive political risk which weighed down its growth prospects is much less of a factor now. There was talk about having the company delist its American depository receipts (ADRs) last year, but all that talk has died down.

Wall Street expects the company to earn $2.54 per share for the third quarter, a 24.2% drop from the prior-year period. However, it expects revenues to grow from $33.66 billion to $38.68 billion. Higher tax rates are likely to be a major factor, with Alibaba losing its Key Software Enterprise status. This will hike the tax rate by a healthy 14%, significantly impacting profits.

The company expects to generate 20% to 23% sales growth for the full year, resulting in 2022 revenues of $135.9 billion. Considering the remarkably low expectations and the accelerating e-commerce momentum, I expect the company to outperform its third-quarter guidance.

Where Will BABA Stock Be in Ten Years?

According to market research firm Report Ocean, the global e-commerce market will grow at a healthy 13.5% from 2020 to 2030. Most of the growth will accrue towards the more up-and-coming markets, such as Latin America and Africa.

For Alibaba, the majority of its revenues are generated from mature markets. Hence, these markets are likely to underperform in the next decade. The company must rely on other geographical areas to drive expansion efforts. Overseas investments and the improvement of digital ecosystems will be critical in getting more shoppers onboard.

Alibaba’s overseas expansion efforts could pay many dividends for the company. Moreover, it already has the mechanisms and strategies to succeed in the international realm. Another key element underpinning Alibaba’s long-term success is the company’s fast-evolving cloud market in China. Alibaba Cloud has a 38.3% market share in Chinese cloud services, head and shoulders above its peers. Moreover, if it can develop chips and its operating system in-house, it could be looking at even better margins for the sector.

Bottom Line on BABA Stock

Alibaba had a rough 2021. However, with the CCP’s floppy attitude as of of late and the lower expectations on the market, BABA stock may be in for a comeback. The next several years will be challenging, but it has the moat to effectively compete with the most established players in its sector, wherever it decides to open up its operations. Moreover, the stock is trading at a highly attractive valuation after the recent dip in price. Hence, BABA stock remains a long-term bet despite the challenges it currently faces.

On the date of publication, Muslim Farooque 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

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.  

Article printed from InvestorPlace Media, https://investorplace.com/2022/02/ignore-the-bearish-noise-and-stay-firm-on-baba-stock/.

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