Despite being up more than 50 percent from where they were trading a year ago, shares of Chinese eCommerce and cloud computing giant Alibaba Group (NYSE:BABA) are still trading far below their record highs.
BABA shares topped out at over $300 in 2020 but today are trading for just over a third of that price, so is Alibaba stock too cheap to ignore, or has the market corrected to a fair price to account for slower potential growth ahead?
Just How Cheap Is Alibaba?
By many standards, shares of BABA look remarkably cheap for a company of its sort. Alibaba is trading at just 15.7 times earnings and 2.0 times both sales and book value. The price-to-cash-flow ratio of 26.3 is a good bit higher, but the overall value picture on Alibaba still looks fairly appealing.
Turning to analyst ratings, it’s interesting to note that all of the standing price targets for BABA imply double-digit upside from its current price of $117.07. The range of price forecasts for Alibaba runs from $129.97 to $175.48, with the average of the range being at $150.78.
If BABA shares reach this average over the next 12 months, shareholders will see a return of nearly 30 percent from today’s price. Even at the lowest price target, the upside would be about 11 percent.
What Do Alibaba’s Prospects Look Like Going Forward?
Over the next 3-5 years, analysts expect to see Alibaba’s earnings per share rise by about 8 percent on an annualized basis. Though certainly not as high as the growth rates the business has been able to deliver in the past, this rate of earnings growth, combined with the currently low valuation of the stock, would likely be enough to put slow but steady upward pressure on share prices.
Like Amazon, Alibaba could also see substantial growth tailwinds from ongoing AI trends. In Q1, for example, Alibaba’s Cloud Intelligence Group reported revenue growth of 18 percent, sharply beating the 7 percent growth rate of Alibaba as a whole. Demand for AI products was specifically cited as a reason for this stronger-than-average growth, and it’s likely that that demand will continue to be a trend that affects Alibaba for the foreseeable future.
Even America’s tariffs, which have put a significant drag on China, may not directly affect Alibaba as badly as some other large businesses in China that focus more on exporting goods. Alibaba’s businesses are largely tariff-resistant, giving it an edge in a macro environment that has been widely disrupted by increased barriers to international trade.
Alibaba also maintains a strong competitive advantage, even though competitors like JD have gained ground in recent years. Alibaba still has a roughly 41 percent share of the Chinese eCommerce market, making it the largest player in the country. While eCommerce accounts for most of Alibaba’s revenue, the business also has a strong share of the Chinese cloud computing market at 37 percent. As such, it seems fair to say that Alibaba has a respectable moat around its business.
What Are the Downsides to Alibaba?
Although Alibaba does have some fairly strong tailwinds behind it, there are also downsides that go some way toward explaining why the stock is seemingly so cheap at the moment. Among these is the state of regulation in China, which has hit Alibaba hard amid the country’s crackdown on large tech businesses.
In 2021, the Chinese government fined Alibaba $2.8 billion in a landmark antitrust case. While Alibaba has since completed a 3-year regulatory rectification process imposed on it by the government, it doesn’t appear that Chinese regulators are likely to allow Alibaba to return to the growth model that served it incredibly well up until 2021.
Another problem for Alibaba is likely to be the ongoing difficulties the Chinese economy itself is facing. Within its eCommerce business, Alibaba’s Chinese revenues still outpace its international revenues by more than three to one. This disproportionately exposes Alibaba to the ongoing slowdown in consumer spending in China.
The rate of disposable income growth in China has slowed dramatically, and consumers are increasingly opting to save their money due to macroeconomic uncertainty. In a country that already has a noted social proclivity for high savings rates, this trend could be quite problematic for an eCommerce business like Alibaba that thrives on discretionary consumer spending.
Is Alibaba Too Cheap to Pass Up?
Between unfriendly regulatory policies and a general slowdown in China’s domestic consumer spending that could persist as the country’s economy is impacted by higher tariff rates, Alibaba isn’t without its problems. The core business, however, still appears quite sound and maintains a strong competitive position within the world’s second-largest economy. The business is also still decently profitable, with a trailing 12-month net margin of 13.1 percent and a return on equity of 12.0 percent.
On the political front, it’s also worth noting that the current tariff policy may not be a permanent feature of American trade economics. Recent polls suggest that voter support for protectionist trade policies is waning, potentially creating incentives for future administrations to either eliminate or roll back some tariffs.
A court battle is also ongoing to challenge the president’s use of executive authority to impose sweeping tariffs, though that case likely won’t be resolved until it goes before the Supreme Court. In the event that tariffs are pulled off in the future, it’s likely that China’s domestic economy would see a decent uptick that would, in turn, likely benefit Alibaba.
On the whole, Alibaba appears to be a potentially undervalued buy at today’s prices. Even with some challenges, Alibaba remains a high-quality business with a fairly strong moat and a decent growth runway in front of it.
While these may not be enough to entice investors if the stock was trading at a large premium to earnings, the current pricing could leave room for significant upside even without blistering rates of growth. As such, Alibaba may be worth considering for investors looking for steady growth and exposure to the Chinese market.
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.