Chinese e-commerce juggernaut Alibaba (BABA) had an incredibly challenging year at the stock market last year. With the implosion of Chinese tech stocks, BABA stock lost roughly 60% of its value from its highs.
However, on the business end, the company continues to grow at a robust pace, with growth rates topping 40%. With a solid outlook supported by multiple growth catalysts, BABA stock remains one of the best value plays in the market today.
Alibaba's woes began when the company's founder Jack Ma, launched a scathing attack on the Chinese financial system in October 2020. The outspoken Chinese business magnate called out the CCP government for its inability to evolve.
Ma's defiant attacks didn't sit well with Chinese regulators who subsequently halted the much-talked IPO of Ant Group, Alibaba's financial technology firm.
However, the dust has now settled on the antitrust case against the group. It ended mid-last year with a record $2.8 billion fine. On the flip side, BABA stock hasn't recovered, with it generating a negative 45% return in the past year.
Nevertheless, the company's financials are firmly in the green. It has grown its revenues from $15.67 billion in Fiscal 2016 to over $126 billion in the last 12 months. Additionally, its five-year average EBITDA growth is over 33%. It isn't a slow-growth company by any means, yet it trades at just 2.6 times forward sales. Therefore, there's plenty of upside with BABA stock as we advance.
Multiple Growth DriversAlibaba's growth story has been nothing short of impressive and is a testament to its robust omnichannel experience. Its annual active user count has grown by a healthy 19.6% in the past year, adding 203 million new customers. That's taking its tally to over 1 billion. Its user base grew by a whopping 126 million in the domestic market and 78 million on the international level.
Furthermore, it is doing an impressive job or growing its business organically. A big part of is its investments in non-core segments to compensate for the slowdown in e-commerce expansion.
A big part of future growth for Alibaba relates to its efforts to accelerate digitization trends in China through its Cloud and DingTalk businesses. There's a massive opportunity with the cloud sector in China, which is expected to grow four times its 2020 size. Moreover, the segment has been profitable on an EBITDA basis over the past four quarters for the company.
Unfortunately, though, the CCP could again prove to be a spoilsport in the company's cloud sector expansion. The Chinese Ministry of Industry and Information Technology (MIIT) recently suspended its collaboration with Alibaba Cloud due to cyber security troubles.
The CCP continues to flex its muscles in an attempt to marginalize the company's presence. The MIIT news is another example of that, which is a headwind that could fade away by the summer. Nevertheless, the underlying business hasn't changed much, as Alibaba marches forward with its strategic investments.
Quarterly Earnings RecapAlibaba recently reported its second-quarter results, behind analyst estimates across both lines. It generated RMB 200,690 million in revenues, reflecting 29.4% growth from the prior-year period. Revenue growth for BABA has slowed down considerably from past years, but for it to continue growing at over 25% is still an amazing feat. It is among some of the elite companies of the world that have sustained such high growth rates for several decades.
Moreover, we have its Digital Media and Entertainment business, which grew by only a small margin from the prior-year quarter. However, the company's cloud computing business saw a healthy growth of 33% from the same quarter last year, representing 10% of total revenues. Additionally, total commerce sales, which contribute to the lion's share of total revenues, increased 31%.
However, this year's guidance was more troublesome for Alibaba's investors. Last year, the company claimed its revenues could increase by 30% in Fiscal 2022. At this time, though, it has reduced its forecast to 20% to 23%. The healthy reduction in revenues was due to lower commerce and customer management sales.
Moreover, the company CFO Maggie Wu states that the revenue slowdown has plenty to do with the rising competition in the Chinese e-commerce business. She warned how the competition was "increasing investments to acquire users."
On a more positive front, its international business, including its Southeast Asian and Turkish marketplace platforms, is doing well. Moreover, its cross-border marketplace AliExpress continues to exceed expectations.
Wall Street's TakeTurning to Wall Street, BABA stock is a Strong Buy. Out of 24 analyst ratings, there have been 21 Buys and three Hold ratings assigned in the past three months.
The average BABA stock price target is $196.94, implying 54.6% upside potential. Analyst price targets range from a low of $140 per share to a high of $252 per share.
ConclusionBABA stock has been in the red for the past couple of years. Its run-ins with the CCP have significantly weighed down its stock and negatively impacted investor sentiment. While there are several reasons to be on the fence with BABA, it's an ideal time to load up on this excellent investment, in my opinion.
Over the next three years, the e-commerce market worldwide is expected to rise over 30% to $6.4 trillion. Moreover, the cloud market could grow at a staggering 15.8% to $1.6 trillion by 2030. Hence, with such colossal addressable markets, it's tough not to feel excited about the company's long-term prospects.
The company is imperative for the Chinese economy's success, and its ecosystem will facilitate domestic growth. Moreover, the great thing about the stock is its compelling valuation. While its financials remain in top shape, its valuation numbers have dropped significantly.
The unique and power-packed combination of Alibaba's strategic investments, valuation, and massive growth prospects overshadows the bearish calls. It's up to every investor to evaluate the company's prospects, but at this time, it looks like a highly attractive bet.
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Shellshocked Alibaba (BABA) investors will be hoping 2022 bears little resemblance to 2021. Last year, shares shaved 50% off their value as the Chinese ecommerce giant’s stock got pummeled from all directions - from government crackdowns to a slowing economy, and the impact of an investment heavy schedule.
While J.P. Morgan’s Alex Yao believes better times are ahead, the analyst thinks they are a way off still, given a macro environment which has “deteriorated worse than expected.”
In November, China online physical goods sales increased by only 5% year-over-year, a “negative surprise against Alibaba’s 8% GMV growth during the Double 11 period.”
The near future doesn’t hold much hope of a turnaround either, says Yao. Following in the footsteps of the education sector in 2H21, recent weeks have seen downsizing at “multiple internet companies.” This in turn has put pressure on employment/consumption. The broader population’s “consumption sentiment” is also likely to remain low due to a declining property market.
Accordingly, Yao has become “more cautious” on China’s online consumption outlook and has reduced his 2021 December quarter Customer Management Revenue (CMR) growth estimate from up 5% year-over-year to negative 2%. “We forecast the negative CMR growth will end in 2022 Jun quarter,” Yao said, “Admittedly with low visibility.”
Policy stimulus aside, the analyst says that over the next few quarters, the most important share price driver of BABA stock will be “earnings revisions.” As a result, Yao believes that until the market identifies an “inflection point,” a worsening CMR outlook will make the stock “vulnerable.”
“While an earnings cut is, to some extent, anticipated by investors given the weak Nov 2021 online retail growth rate reported by NBS,” the analyst summed up, “We think the stock will continue to be under pressure in the near future, despite low valuations.”
Despite the cloudy forecast, Yao remains with the bulls. The JPMorgan analyst rates BABA shares an Overweight (i.e., Buy) along with a $180 price target. The figure implies ~42% upside from current levels. (To watch Yao’s track record, click here)
Overall, the majority of Wall Street analysts remain on Alibaba's side. Barring 3 skeptics, all 19 other recent reviews are positive, providing the stock with a Strong Buy consensus rating. Moreover, the average price target is a confident one; at $199.12, the figure suggests 12-month upside of ~57%. (See Alibaba stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.