E-commerce juggernaut Alibaba (BABA) posted extremely strong earnings this past quarter.
Investors may read headlines such as “Alibaba Posted its First Operating Loss as a Public Company,” and immediately look to hit the sell button. That is less than an ideal way to view the company's loss right now.
Yes, BABA stock dropped precipitously on its earnings report, and yes, downside momentum is not in the favor of investors in BABA stock.
However, Alibaba has been beaten down to a level that simply doesn’t make sense. Investors ought to give this growth stock a good hard look right now.
Incredible Earnings Highlight Alibaba’s Strong Investment Thesis
Alibaba’s recent earnings report highlighted the opportunity available to investors at an incredible discount today.
The Chinese e-commerce giant posted revenue that beat analyst expectations by a significant margin. Alibaba’s 187.4 billion RMB ($28.6 billion) revenue greatly surpassed expectations of 180.4 billion RMB. This represented a revenue growth rate of 64% year-over-year.
The bar the market set for revenue growth was high, and Alibaba pole-vaulted over this target with ease.
On the bottom line, Alibaba’s performance was indeed hindered by a massive $2.8 billion (18.2 RMB) fine for abusing its market position. The company’s net loss of 5.5 billion RMB was significantly lower than Wall Street estimates of a 6.95 billion RMB profit. However, the fine aside, Alibaba more than beat on its top and bottom line.
The fact that this fine wasn’t factored into analyst expectations led to what many view as an oversight. The fine shouldn’t have come as a surprise to the market. However, since it was issued less than a month prior to Alibaba’s earnings report, analysts may not have had the time to adjust their models and target prices accordingly.
Technicals and Fundamentals Point to Serious Value
From a technical standpoint, it’s hard to view the recent selling in BABA stock as anything other than a buying opportunity.
Indeed, this stock is now trading near the bottom of its 5-year Bollinger band range. In other words, this stock is trading near two standard deviations away from its long-term moving average. As many investors who believe in the fundamental laws of finance know, this indicates BABA stock is in some seriously oversold territory.
From a fundamental standpoint, Alibaba’s recent earnings only highlighted the growth thesis underpinning this stock. The company grew earnings at a 64% year-over-year clip. The company’s logistics business grew by 101%, its core commerce business grew by 72%, and its cloud computing division grew by 37% year-over-year.
Importantly, investors should note that Alibaba’s cloud computing segment has recently become profitable. For those considering a comparison of Alibaba to U.S. players like Amazon (AMZN), this is a good sign. Amazon’s AWS segment has become a profit-generating machine for the company. Such an outlook for Alibaba makes this stock appear really cheap at these levels.
What Analysts Are Saying About BABA Stock
According to TipRanks’ analyst rating consensus, BABA stock comes in as a Strong Buy. Out of 26 analyst ratings, there are 25 Buy recommendations and 1 Hold recommendation.
As for price targets, the average analyst price target is $304.55. Analyst price targets range from a low of $270.00 per share to a high of $350.00 per share.
Bottom Line
There are few growth stocks investors can pick up at a forward price-to-earnings ratio of around 20 today. Given a forward revenue growth estimate of 30% for Alibaba, as per its recent earnings release, this is a stock trading well below a PEG of 1.
Alibaba is perhaps the cheapest large-cap growth pick in the market today. Investors would certainly be remiss to ignore this opportunity today.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
E-commerce is experiencing substantial growth in China. According to a World Economic Forum report from earlier this year that cited data from Statista and eMarketer, Chinese e-commerce made up more than half of global Internet retail sales. According to eMarketer, e-commerce in China is expanding at a faster pace than anywhere else in the world.
From 2016 to 2020, China’s share of e-commerce as a part of total retail sales in the country more than doubled from 20% to 44%. In contrast, the share of e-commerce as a part of total retail sales in countries like U.K. and the United States was 27.7% and 14.5%, respectively, over the same period.
Using the TipRanks Stock Comparison tool, let us compare two Chinese e-commerce companies, Alibaba, and JD.com, and see how Wall Street analysts feel about these stocks.
Alibaba (BABA)
Alibaba Group Holding Ltd. is a Chinese e-commerce giant, founded by Jack Ma, that operates various online marketplaces that cater to different market segments. The company’s TaoBao is a marketplace that is specifically tailored towards individuals and small businesses while TMall is an online marketplace for premium products.
Ali Express targets global customers and enables them to buy directly from manufacturers and distributors located not only in China but also internationally.
Freshippo is the company’s grocery retail chain while Lazada is an online retailing platform that specifically caters to customers in South East Asia in countries like Singapore, Thailand, Vietnam, Indonesia, the Philippines, and Malaysia.
The company has also started a local services and on-demand food delivery platform in China after it acquired Ele.me in 2018. In FY21, Ele.me’s active customer base on an annual basis was up 20% year-over-year due to improvements in users' experiences. BABA intends to continue investing in the platform as it perceives a cross-selling opportunity between the food delivery service and its other on-demand services.
Alibaba also provides cloud services and operates a logistics network, Cainiao Network, which Ali Express leverages for its services. Alibaba intends to continue investing in cross-border logistic hubs in Europe, strengthen infrastructure support to international and local e-commerce businesses, and develop its logistics network in key markets.
Last week, BABA reported fiscal fourth-quarter results and posted revenues of 187.4 billion yuan, a jump of 64% year-over-year, beating the consensus estimate of 179.9 billion yuan. However, the company reported an operating loss of 7.7 billion yuan, its first quarterly loss as a public company since its IPO in 2014.
A major reason for this loss was an antitrust fine of 18.2 billion yuan that Chinese regulators slapped on the company in April. Excluding the fine, it would have reported an operating profit of 10.6 billion yuan.
The company plans to ramp up investing in core strategic areas in FY2022 which include helping merchants reduce their operating costs, acquisition of new users, technology innovation, strengthening supply chain capabilities, developing infrastructure, and increasing geographic coverage in China. It anticipates revenues in FY22 of 930 billion yuan, indicating nearly 30% growth year-over-year.
Alibaba had annual active consumers of around 891 million in China by the end of March. The company is targeting growing its Chinese customers to over 1 billion in FY22.
BABA is also looking at strengthening its investment in Taobao Deals, which offers value-for-money products for price-conscious consumers. The company is looking at reaching out to consumers in rural and under-developed areas in China with Taobao Deals. The Taobao Deals app had 130 million active users in March, 27 million more than it had in December last year.
The popularity of the app has also resulted in average spending increasing more on Taobao Deals than the increase in average spending of consumers on Chinese retail marketplaces.
The company provides cloud services to different industries under the brand, Alibaba Cloud, which was one of the company’s fastest-growing businesses in FY21 and a key revenue growth driver. This business has turned profitable over the last two quarters. Alibaba intends to invest more in this business by investing in core products such as big data platforms, database and storage, and other Platform as a Service (PaaS), and Infrastructure as a Service (IaaS) products.
Alibaba believes that Taobao Deals, Taobao Grocery, Freshippo, and new features added to its core platform will continue to be long-term growth catalysts for the company. As a result, BABA continues to remain focused on strengthening these businesses. (See Alibaba stock analysis on TipRanks)
Last week, Robert W. Baird analyst Colin Sebastian lowered the price target from $285 to $270 and reiterated a Buy on the stock. Sebastian commented on the company’s fiscal Q4 results in a research note to investors, “Sentiment remains decidedly mixed, but we continue to like BABA for patient, longer-term investors.”
“However, we expect that "core marketplace" margins should remain relatively steady, even as Alibaba spends aggressively to grow New Retail initiatives (including community/group sales), expand logistics and local services, and drive further momentum for Taobao Deals. Also notable, Alibaba Cloud revenues missed expectations due to the loss of one large customer,” Sebastian added.
Consensus among analysts on Wall Street is a Strong Buy based on 25 Buys and 1 Hold. The average analyst price target of $304.55 implies 41.3% upside potential to current levels.
JD.com (JD)
JD.com is a Chinese e-commerce platform that reports primarily under three business segments; retail, logistics, and new businesses. The company’s retail arm provides around 500 million active customers direct access to a wide array of products including electronics, apparel, fast-moving consumer goods (FMCG), and fresh food. The company also has an international platform, JD Worldwide, which enables international brands to sell directly to customers in China, even if they don’t have a brick-and-mortar presence in China.
JD’s logistics business provides supply chain and logistics solutions to businesses while the new business segment includes the company’s international business, its cloud, and artificial intelligence (AI) business, JD Property, and Jingxi. Jingxi operates in retail and focuses on lower-tier markets in China.
The company posted better-than-expected Q1 results on May 19. JD.com’s Q1 earnings came in at $0.38 (RMB2.47) per ADS, versus RMB1.98 in the same quarter last year. Analysts were expecting earnings of $0.35 per ADS.
JD reported net revenues of $31 billion (RMB203.2 billion) up 39% year-on-year surpassing analysts’ expectations of $29.8 billion. Results were supported by outstanding performance in both the services and product sectors.
While the company did not provide any formal fiscal guidance, JD remained optimistic about its retail business over the long term. The company has already brought brands like Starbucks, Decathlon, and Guozijian to its platform. JD will celebrate its 18th anniversary at its upcoming grand promotion on June 18. One of the company's goals is to help more than 230 brands achieve sales of RMB100 million.
JD stated at its earnings call that its retail business model has evolved beyond an online business-to-consumer (B2C) e-commerce model and that the company was looking at ways to become an omnichannel retailer by strengthening its supply chain management and logistics and leveraging its integrated marketing capabilities, to be able to serve its consumers, anywhere and anytime.
The company stated at its earnings call, “JD Retail, as the core business of JD.com, will continue to strive for high-end healthy growth in 2021 and serve as the cornerstone for JD.com's overall development.” (See JD.com stock analysis on TipRanks)
On May 19, Stifel Nicolaus analyst Scott Devitt reiterated a Buy and a price target of $95 on the stock. Devitt said in a note to investors, “As a base case, we expect stable margins in 2Q for JD Retail on a y/y basis as the company compares against one-time benefits in 2Q:20 stemming from government incentives related to the pandemic.”
“We continue to expect measured investments in the company's key strategic areas, including supply chain and logistics, omnichannel, and social commerce will limit margin expansion in 2021. We are modestly raising our FY revenue estimates, reflecting ongoing strength in customer acquisition, though leaving our margin forecast unchanged,” Devitt added.
Consensus among analysts on Wall Street is a Strong Buy based on 15 Buys and 2 Holds. The average analyst price target of $102.24 implies 39.9% upside potential to current levels.
Bottom Line
While analysts are strongly bullish about both Alibaba and JD.com, based on the upside potential over the next twelve months, Alibaba seems a more compelling buy.