Is Alibaba Stock Price Forecast To Rise?

The Alibaba Group is China’s largest online shopping platform, operating a multi-engine business portfolio that includes retail marketplaces, logistical services, digital media and cloud computing.

Revenues Keep Growing, But BABA Keeps Falling

Alibaba’s financial figures for Q3 2021 were overwhelmingly positive. The company easily outperformed analyst’s expectations with an earnings per share of $3.41 (beating by $0.21), and revenues up 37% year-on-year at $34.25 billion.

Free cash flow increased by 23%, EBITDA grew by 22%, and active consumer numbers kept rising to 779 million, up 22 million over the quarter. 

But still, Alibaba’s stock price has been falling since October’s high, and this while many of the main market indices like the Dow Jones and the S&P 500 have continued to climb.

Possible reasons for this downturn could include the Chinese Communist Party’s (CCP) intervention in the Alibaba-affiliated Ant Group IPO, or the temporary disappearance of Alibaba’s former chairperson Jack Ma. The general technology sell-off in early 2021 could also play a part too.

Alibaba Is Highly Profitable

Regardless of Alibaba’s current price woes, the firm is still profitable. Revenue from its core commerce business yielded an adjusted EBITA of $10 billion in the last quarter, up 38% year-on-year.

The vast majority of Alibaba’s profits come from its core commerce operations, which includes its online platforms, brick-and-mortar outlets, and its Cainiao shipping wing. In fact, 86% of its top line in fiscal 2020 came from core commerce businesses. 

Furthermore, having never made a profit for the company before now, Alibaba Cloud has gone from facing serious headwinds in the past to being a catalyst in-and-of itself. The segment has always generated good revenues for Alibaba, but never managed to make positive earnings. That is until now. 

In a welcome turnaround, Alibaba announced in its latest quarterly results that its cloud division increased revenues 50% year-on year to bring in $2.5 billion, and by doing so posted its first ever profits for the department.

Alibaba’s strategy of funding lower margin segments like cloud, with the revenues from its higher margin retail platforms like Taobao, appears to be paying off.

Significant Risks From Regulation & Competition

Regulatory oversight from both sides of the Pacific Ocean pose an immediate threat to Alibaba’s business, as Trump-era sanctions against various Chinese companies begin to bite, and the State Administration for Market Regulation in Beijing opens up an anti-trust investigation against the company. 

Although these developments in themselves are new, they are not particularly novel. And since CCP oversight of native Chinese companies is a given, and the trade wars between the US and its Asian rival have been ongoing for quite some time now, these risks can be assumed to be of the less worrying kind.

China, after all, wants to paint a picture of being an enterprise-friendly country, and any heavy-handed treatment of Alibaba wouldn’t do much for inward investment into its economy. 

But a more pressing concern for Alibaba comes from good old-fashioned competition pressure.

The company currently derives 70% of its revenues from the Chinese market, and there’s a sense that for continued growth the firm must look to other countries to maintain the impetus.

But this means going into direct competition with sector megaliths, such as Amazon (AMZN) in the U.S. and Sea (SE) in Singapore. And taking on companies with robust brand reputations and already established multi-platform presences will inevitably drive down Alibaba’s margins and make profitability in the future even more difficult to achieve.

BABA Valuation & Stock Price Prediction

Alibaba’s revenues have been growing strongly for the last few quarters, and if you couple this with a share price that is almost down 30% from its all-time high last year, you surely have a growth stock with massive upside potential.

The picture is even more enticing when you consider Alibaba’s valuation metrics against its nearest competitors.

For instance, Alibaba’s forward revenue growth is 37.17%, and its forward P/E ratio 18.96. Compare this to JD.com’s figures of 27.62% and 29.45 respectively, and it’s obvious that Alibaba is currently undervalued by quite some way.

In fact, Alibaba has a higher forward annual growth rate, and lower P/E value, than most other major players in the space, including Amazon (AMZN), Tencent, and Baidu (BIDU).

Taking the example of JD.com, it’s not unreasonable to say that Alibaba could trade at 1.55x its current price just on the discrepancy between their P/E values (29.45/18.96). This would give a rough price target of $351 for Alibaba stock, even before factoring in its superior growth rate.

Is Alibaba Stock Price Forecast To Rise? Conclusion

For a company with a majority share of the Chinese e-commerce market, sales still growing at an annualized rate of 47%, and a customer base continuing to expand with every quarter, Alibaba’s performance is nothing short of astonishing. 

Its share price discount of close to 30% off of all-time highs probably reflects a combination of regulatory pressure and general market trends, both of which are factors that could resolve in Alibaba’s favor at any point in the short- to mid-term. 

Given the company’s excellent financial metrics when compared with its nearest peers and its turn towards multi-segment profitability, Alibaba represents an excellent buying opportunity for both growth and value investors alike. If the right catalysts play out in the correct order, Alibaba stock could climb very high in a very short space of time.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.