Is Alibaba (NYSE:BABA) topping out? Not so fast! Yes, Alibaba stock has rallied nearly 70% from its novel coronavirus lows, but the catalysts that drove shares higher in the past six months are far from over. I’m not just talking about the company’s exposure to Chinese eCommerce. Its cloud business, while still in growth mode, stands to become another potential profit center for the company.
That’s not all! Add in the “hidden value” of its stake in Ant Inc, and there’s plenty of gas left in the tank.
Top and bottom-line growth remains solidly in the double-digits. And with megatrends (i.e., rise of China’s middle class) still in motion, there’s little that can derail the story behind this growth stock.
Put it all together, and it’s clear why shares are a solid buy at today’s prices. Sure, with the stock holding steady between $270 per share and $280 per share, you may think another pullback is in the cards.
Yet, with so much on its side, consider this near-term breather prime time to enter a position ahead of another move higher.
3 Reasons Why Alibaba Stock Remains a Solid Buy
There are multiple factors at play that can drive this powerhouse’s shares higher. Even after the blockbuster performance of the stock since March.
Firstly, the company’s dominance of eCommerce in China. As I discussed previously, China’s eCommerce sector offers tremendous runway. Namely, due to the rapid rise of the middle class in the world’s second largest economy. China’s middle class is already larger than the total U.S. population (400 million vs. around 330 million people).
That’s just the start. In a matter of years, China’s middle class numbers could top 550 million people. With that rise in customers with disposable income, names like Alibaba will crush it even further. With its flagship platform Tmall holding 50% market share, double its closest competitor, it’s no contest who gains the most from the rising middle class megatrend.
Secondly, the company’s cloud business fast becoming a major business unit. Granted, the cloud unit isn’t yet profitable, but it’s a profit center in the making. With cloud demand booming in China, things are starting to accelerate. Cloud spending in China jumped 70% in the first six months of 2020. And Alibaba’s cloud unit took 40% market share. Just like with eCommerce, that share is more than double its closest competitors!
Thirdly, the “hidden value” with its one-third stake in fintech giant Ant Group. Once Ant goes public, Alibaba’s stake could be worth around $67 billion (based on Ant’s $200 billion valuation).
Sure, that’s small change compared to the company’s current market capitalization ($740.9 billion). But, this stock could see a boost if Ant Group shares take off post-IPO.
Why Have Shares Cooled in Recent Weeks?
With so much on its side, why have investors shunned Alibaba stock in recent weeks? That’s a good question. One would think beating Wall Street estimates last month would help keep shares trending higher.
While resilient compared to U.S.-based tech names, the September sell-off in this winning sector has had an impact. Short-sellers betting against Chinese stocks on the heels of rising U.S.-China trade tensions is another factor putting downward pressure on the stock.
Yet, neither of these factors hurt the bull case for Alibaba. In fact, the stock market’s cooling interest is giving investors who missed out at lower prices an opportunity to jump in at a reasonable price.
Sure, with the stock’s forward price-to-earnings ratio of 29.2, it’s not like shares are changing hands at fire sale prices. Due to concerns U.S. investors have about Chinese stocks, however, shares are cheap compared to its stateside peers, considering its projected earnings growth of around 25%.
You can’t find a U.S.-based stock with similar fundamentals trading at such a relatively low multiple. By ignoring overblown “China risk” concerns, you can buy this growth name at a fantastic price.
Far From Topping Out, Now’s The Time to Buy
Given how shares have performed in recent weeks, some may think Alibaba is peaking at today’s prices. Despite cooling interest in the stock, the underlying fundamentals haven’t changed.
The company continues to crush it in Chinese eCommerce. Cloud is still a work-in-progress, but given the acceleration in cloud spending, it’s inevitable this unit will become a major profit center.
Add in the “hidden value” of its Ant Group stake, and it’s clear there’s plenty left in the tank for Alibaba stock. Far from topping out, now’s the time to buy.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.