As the rest of the world continues to fight the novel coronavirus pandemic, China is crawling its way back to normalcy. And that means China-based companies like Alibaba Group (NASDAQ:BABA) have been feeling the pressure.
The country’s e-commerce sector was on a high growth trajectory prior to the crisis, and I believe that strong growth is likely to return for the sector in the coming quarters. This makes Alibaba stock worth considering.
Prior to the crisis, BABA stock had touched a high of $231. Currently, however, the stock trades lower by 14% at $198.50. So clearly, the stock has been resilient as the markets discount the upcoming positive triggers.
From a valuation perspective, I believe that Alibaba stock is a “screaming” buy. Analysts expect earnings growth to average 24.6% annually over the next five years. Alibaba also trades at a forward price-earnings (P/E) ratio of 23.8. This implies a price-earnings-to-growth-ratio of less than 1, which points to undervaluation.
Therefore, it’s not surprising that the stock has quickly bounced back from the coronavirus driven market downside.
Macro-Economic Factors Will Support Growth
It’s important to note that China’s manufacturing sector growth is likely to remain sluggish with exports being impacted. However, the consumption sector has the potential to support GDP growth in the coming quarters.
Policymakers in China are already looking at monetary easing to boost economic growth. In turn, this can trigger consumption spending. Chinese consumer sentiment has already improved since the peak of the crisis.
Therefore, monetary policy support coupled with improving consumer sentiment is positive for companies like Alibaba, JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD).
Another factor that’s positive for Alibaba is the potential change in consumer behavior after the pandemic. As an example, online grocery demand has surged recently. Alibaba’s Hema chain stands to benefit with the company shipping fresh food nationwide to consumers.
Moreover, it’s expected that China’s online grocery market will grow 62.9% in fiscal year 2020 to 264 billion yuan. JD.com’s 7Fresh supermarkets also stand to benefit from this trend.
Other Revenue Growth Triggers
The company’s cloud computing segment is a potential long-term cash flow machine. For the third quarter of 2020, Alibaba reported 62% growth in revenue for the segment. And while adjusted EBITDA margin was still negative at 3%, there has been a gradual improvement.
In terms of market share, Alibaba Cloud had a global market share of 5.4% as of Q4 2019. Specific to China, the business has a leading market share of 46.4%. With the coronavirus driven crisis boosting demand for cloud infrastructure, Alibaba will be investing $28 billion in cloud services.
Last year, Alibaba also unveiled its first artificial intelligence chip. This would enable the company to sell new cloud services to its customers. These developments are likely to ensure robust cloud business growth and sustained increase in market share.
From a cash flow perspective, China’s core commerce business continues to drive free cash flows. However, another segment that is likely to deliver robust cash flows is the company’s Southeast Asian business. To put things into perspective, Lazada has the largest consumer base in Southeast Asia. In addition, the company has reported five consecutive quarters of 100% growth. And with markets like Indonesia holding big potential, Lazada is another positive trigger for Alibaba stock.
My Concluding Thoughts on Alibaba Stock
As of December 2019, Alibaba reported cash and equivalents of $50.4 billion. Furthermore, for Q3 2020, the company’s free cash flows were $11.2 billion. The point I want to make here is that the company has robust financial flexibility. This will allow Alibaba to pursue aggressive organic and inorganic growth.
Additionally, the company’s growth is not limited to China. The cloud business has the potential to make significant inroads in Asia. In addition, Southeast Asia is a big e-commerce market.
Considering these growth triggers, Alibaba is attractive beyond the current crisis. Alibaba stock has remained resilient in the recent past and the price is a reflection of the growth to come. As China’s economy recovers, I expect upside for the stock in the coming quarters.
Overall, Alibaba stock is worth considering for investors with a long-term investment horizon. With earnings growth expected to remain over 20% in the coming years, the stock looks attractive for the core portfolio.
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 a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
