At $95 Is Alibaba Stock Worth The Risk?

BABA: Alibaba Group logo
Alibaba Group

Chinese e-commerce behemoth Alibaba stock (NYSE: BABA) has been one of the worst-performing mega-cap technology names. While the stock remains down by about 20% year-to-date, it has fallen by close to 70% from all-time highs seen in October 2020. In comparison, the S&P 500 remains down by 8% year-to-date, although it has risen by over 25% from October 2020 levels. There are multiple factors that have been hurting Alibaba’s stock. Chinese regulators have been cracking down on homegrown technology giants focusing on data, privacy, and anti-trust issues, and there are concerns that Internet platforms could face more intense regulatory scrutiny. Alibaba has already faced a sizable antitrust fine and its affiliate Ant Group has been asked to spin off some of its credit and lending businesses. There have also been concerns about the futures of Chinese stocks listed on U.S. exchanges, as regulators look to make Chinese companies comply with U.S. auditing rules. Besides the regulatory headwinds, China’s economy could also be heading for a slowdown, amid widespread Covid-19 related lockdowns, a weak real estate market, and uncertainties relating to the war in Ukraine. This could potentially impact growth rates for companies such as Alibaba. 

However, we believe that Alibaba’s stock is considerably undervalued. At its current market price of about $95 per share, Alibaba trades at just about 12x 2022 earnings (fiscal year ended March). While there are certainly headwinds for the company, Alibaba is still expected to grow at near double-digit levels in the coming years. Consensus estimates point to over 20% growth for FY’22 and around 12% growth for FY’23. In comparison, Amazon trades at over 60x projected earnings, with projected revenue growth rates only incrementally above Alibaba’s. Alibaba’s management also seems to think its stock is undervalued, as it recently raised its share buyback program to $25 billion up from $15 billion, marking its second increase in just about a year. Regulatory pressure could also potentially ease. Chinese Vice Premier Liu He noted that country would take more steps to boost the economy and stabilize the capital markets. Although the specifics aren’t clear, investors should see this as a step in the right direction, given the magnitude of the sell-off in Chinese technology stocks. There have been reports that the Chinese Securities Regulatory Commission was working to loosen auditing rules while making auditing reports for Chinese ADRs available to U.S. regulators, reducing concerns of delisting from the U.S. exchanges. We estimate Alibaba valuation at about $185 per share indicating a potential upside of 94%.  See our analysis of Alibaba revenues for more details on how Alibaba’s revenues are likely to trend.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns Apr 2022
MTD [1]
YTD [1]
Total [2]
 BABA Return -12% -20% 9%
 S&P 500 Return -2% -7% 99%
 Trefis Multi-Strategy Portfolio -1% -9% 259%

[1] Month-to-date and year-to-date as of 4/16/2022
[2] Cumulative total returns since the end of 2016

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