Could this be the last year that Alibaba Group Holding Limited (NYSE:BABA) trades below $100 per share?
China’s e-commerce leader sits more than 70% below its October 2020 peak. Albeit during the bursting dot com bubble, it is reminiscent of when Amazon.com dipped as low as $5.60 in 2001. Two decades later, it became a $3,000 stock.
Alibaba’s domestic market consists of over 1.4 billion people. That’s over four times the population of the U.S. and forty times that of Canada. Access to a massive consumer base and knowledge of local tastes is no doubt a huge long-term advantage.
Of course, sheer market size can’t overcome all challenges. China is recovering from the pandemic, but in a sluggish fashion. Its economy grew 6.3% year-over-year in the second quarter but just 0.8% from the first quarter. This has economists calling for aggressive government stimulus that is far from certain to happen.
Meanwhile, Alibaba’s core China Commerce segment is off to a slow start this year amid increased competition. The company’s restructuring plan is a huge undertaking that adds plenty of uncertainty. Not to mention the constant regulatory overhang of China’s state-controlled economy.
These risks won’t disappear anytime soon, and the transformation could take years to play out. This could keep the lid on Alibaba’s stock gains in the intermediate term. But as the market awaits signs of progress, the current transitory period could be looked back upon as an Amazon-esque ‘coulda, shoulda, woulda’ opportunity for long-term investors.
In pro sports, we often hear about generational talent. When it comes to dominant publicly traded companies, Alibaba is a top draft pick. Here are five reasons why.
#1 - China E-commerce Is a Gold Mine
There are over 400 million middle-class consumers in China, the world’s largest e-commerce market. As low-cost internet access and smartphone ownership continue to spread throughout the country, this number is projected to triple to 1.2 billion by 2027. If it does, 1 in 4 middle-class consumers will hail from China.
Alibaba controls more than 50% of online shopping in China. The company is defending its turf by rolling out new features in line with the hottest e-commerce trends — personalization, social commerce and digital payments. Taobao, its most popular website, is giving customers 1) customized products and personalized recommendations, 2) ways to interact with merchants, influencers and each other, and 3) convenient checkout via e-wallets.
Alibaba’s domestic e-commerce market is in a soft patch but, like U.S. commerce, will continue to grow over the next 20 years.
#2 - International Expansion Potential Is Vast
Like Amazon, Alibaba has evolved into a conglomerate of many businesses — food delivery, logistics, digital media & entertainment and cloud services. An underappreciated part of the diversification story is international expansion.
Foreign markets are embracing Alibaba’s international commerce websites, including Aliexpress, Lazada, Daraz, Trendyol and its original site, Alibaba.com. The recent launch of Tmall Global will give foreign merchants direct access to Chinese consumers, boosting the number of active buyers and gross merchandise value (GMV) on the Alibaba platform.
In Q1, when China commerce sales fell 3%, international retail sales surged 41%. The best part — international commerce accounted for just 8% of total sales, leaving lots of room for expansion.
#3 - Cloud Spinoff Is a Positive
A big step in the restructuring process is the planned spinoff of the Cloud Intelligence Group. While this has bothered some investors because the segment encompasses data centers, artificial intelligence and other promising technologies, the reality is that this is a struggling business.
In contrast to Amazon where AWS is the big profit center, Alibaba’s cloud group is less than 10% of the business and nowhere near as profitable (often turning in quarterly losses). Shedding this business to focus on commerce should be considered a positive for BABA shareholders.
#4 - The Valuation Is Ridiculously Low
As Alibaba’s share price has descended from over $300, consensus earnings estimates have also declined — albeit at a slower rate. This has resulted in a low price-to-earnings (P/E) ratio of 11x forward 12 months earnings. The valuation represents a huge discount to the forward P/E’s of fellow e-commerce leaders Amazon (75x) and Mercadolibre (62x).
#5 - Wall Street Loves BABA…So Does Charlie Munger
Thirteen out of the fourteen Wall Street research firms that actively cover Alibaba have Buy ratings. Absent last month’s downgrade to Hold at Bernstein, analyst sentiment would be unanimously bullish.
The consensus price target of around $143 implies more than 50% upside over the next 12 months. A 50% return in each of the next three years would bring BABA to a new all-time high.
There’s one more prominent influencer that’s big on Alibaba. Warren Buffett sidekick Charlie Munger owns 25 million shares in his Daily Journal Corp. portfolio to complement three bank stocks.
Alibaba is expected to give its second-quarter update in late August 2023.
