Alibaba's New Target: $480 By End-2021

Summary

• Asian markets cheered President Trump's prompt recovery from his coronavirus infection and his subsequent release from the hospital.
• Broadly positive travel and consumer spending data of the Chinese amid their Golden Week holiday and the steady China services activity index for September kept the positive momentum going.
• Alibaba's publicity in its support of numerous U.S. small and medium-sized businesses to go global could help somewhat in shielding itself from the attacks by the rising U.S. political rhetoric.
• A revisit of Alibaba's multiples over Amazon suggests investors could continue to derive greater returns from the former going forward.
• The current price uptrend of Alibaba which began in early 2019 is reminiscent of its trading pattern in 2015-2018. If it indeed pans out like in the past, Alibaba could reach for $400 in early 2021 and $480 by the end of the year.

By ALT Perspective

Despite the reported Chinese netizens' perception of President Donald Trump's coronavirus infection as a "comeuppance", Chinese investors together with Asian ones cheered his prompt recovery over the weekend. His subsequent release from the hospital further boosted market sentiment.

Building on the good start to the week was news that the two sovereign wealth funds of Singapore, GIC and Temasek, would participate in the highly anticipated initial public offering of Ant Group, reinforcing speculations since a month ago of their interest. Bloomberg reported last week that GIC planned to invest more than $1 Billion in the fintech unit of Alibaba Group (NYSE:BABA). The duo would be adding to their existing holdings in the company.

Broadly positive travel and consumer spending data of the Chinese released in bits and scraps amid their 8-day long Golden Week holiday kept the positive momentum going. Chinese credit cards/ATM payment processor UnionPay announced that transactions over its network rose 15 percent year-on-year. 425 million domestic tourist trips were made during just the first four days of the holiday.

Tickets to the Great Wall were sold out and the crowd could have been larger if not for the capacity being capped at 75 percent. A similar situation happened at tourist attractions across the country. With international travel largely still restricted, tens of millions of Chinese who would typically be touring outside of China during the extended public holiday looked to local destinations instead, benefiting the domestic economy.

While most movie theaters around the world are shuttered, those in China are experiencing roaring business. Nearly all cinemas (~95 percent) returned to operations by September, according to financial services firm China International Capital Corp. The Chinese box office receipts were RMB3.9 billion (USD581 million) over the eight-day holiday period, the second-highest amount ever for the Golden Week.

This is in stark contrast with what's happening in the U.S. and the U.K., where Cineworld (OTC:CNWGY), the owner of No. 2 U.S. theater chain Regal, plunged more than 40 percent. Last Monday, the chain confirmed weekend reports that it would "temporarily" suspend operations at all 536 Regal theaters in the U.S. and its 127 Cineworld and Picturehouse theaters in the UK, starting Thursday.

The bullish sentiment in Asia was not dampened one bit by mid-week reports of the U.S. government considering moves to restrict the payment systems of Alibaba's Ant Group and Tencent Holdings' (OTCPK:TCEHY)(OTCPK:TCTZF) WeChat Pay due to security concerns. The latest potential crackdown on more Chinese technology services is coming even as the attack on ByteDance's (BDNCE) TikTok has yet to be resolved.

Ironically, each episode of the U.S.-China rhetoric seemed to highlight the increased dominance of Chinese apps in the world. Hedge fund manager Kyle Bass tweeted an incident of a senior U.S. government official finding out the only way he could pay for his meals at an Ethiopian airport was by Alipay or WeChat Pay. While an annoyance to non-Chinese travelers, this could only be music to the ears to shareholders of Alibaba and Tencent.

Source: Twitter

Rounding up the good week was the jump in renminbi [RMB]. The appreciation in the Chinese currency was said to be the strongest single-day gain by the RMB versus the U.S. dollar in 15 years. Supportive drivers include the fervor over the IPO of Alibaba's (BABA) Ant Group and a firmer lead by former Vice President Joe Biden in the latest polls.

Besides being a reflection of the improving economy, the stronger RMB also means that the earnings of the companies would be higher when reporting in USD. That would make the next quarterly results an easier beat just on the conversion alone.

Source: XE.com

With those positive drivers, the representative ETFs of Chinese companies (FXI)(MCHI) rallied in line with their U.S. counterparts (DIA)(SPY) in the past week. In particular, the Invesco China Technology ETF (CQQQ) jumped 5.13 percent higher, surpassing the 4.15 percent enjoyed by the Invesco QQQ Trust (QQQ).

Data by YCharts

The Chinese Internet sector representative ETF, the KraneShares CSI China Internet ETF (KWEB), did well relative to the broader Chinese ETFs and even their U.S. counterparts, closing up 6.5 percent for the week. The release of the Caixin China General Services Business Activity Index, a measurement of the strength of the service sector in China, after Asia markets closed but prior to the start of the U.S. trading, spurred additional buying of U.S.-listed Chinese stocks.

The survey compiled by IHS Markit (INFO) revealed that China's services activities were continuing on its post-epidemic recovery, with the reading in expansionary territory for the fifth consecutive month. Companies indicated they remained confident about the economic outlook and were positive aboutthe "ongoing economic recovery and the effective control of the epidemic in China." In my previous article, I shared the buoyant indices for the manufacturing sector for both the official and private surveys.

Among the key holdings of the KWEB ETF, the share price of GSX Techedu (GSX) headed the leader board of gains with a 22.9 percent appreciation. I highlighted the online K-12 large-class after-school tutoring service provider in September, after the KWEB ETF bumped the company to its seventh-largest holdings. Several readers who held short positions in the stock vigorously alleged shenanigans happening at GSX Techedu.

Bilibili (BILI) also posted large gains, rising 15.9 percent for the week after it was reported to be working towards a secondary listing in Hong Kong. The online entertainment services provider had engaged four banks for the offering, joining a growing list of U.S.-listed mainland-China companies to pursue a Hong Kong secondary.

The relatively fresh IPO name KE Holdings (BEKE) continued to appreciate steadily, validating growth investors' strategy. Unlike its U.S. counterpart, the Chinese Zillow (Z) which became a top 10 holding of the KWEB ETF recently, is profitable. Analysts expect its forward P/E ratio to shrink significantly from 133 times currently to 53 times based on 2020 earnings.

Despite the favorable travel statistics coming out of China during the Golden Week holiday, online travel agency Trip.com (TCOM) was seemingly neglected by market players. Its share price rose a mere 3.7 percent and faced the ignominy of being the worst performer among the top holdings of the KWEB ETF.

As explained in a past issue of the Chinese Internet Weekly, I found the KWEB ETF holding the most representative stocks in the sector. As such, an overview of the week's share price movements of the top few holdings of KWEB as compared with the ETF itself is provided as follows for convenient reference especially for the stocks mentioned in this article.

Data by YCharts

In the subsequent sections, I will update on Alibaba Group and argue that investors would derive greater returns from Alibaba than Amazon (AMZN) going forward, building on its recent outperformance over the latter.

Alibaba is helping U.S. brands go global

The Trump administration has intensified its scrutiny on Chinese companies as we head into the elections. For numerous American executives, their attention is focused on another important event in November instead - the Singles' Day shopping extravaganza in China. As a media headline screamed, Alibaba is courting the same American brands that Amazon has on board.

Source: Vogue Business

American executives could be thinking otherwise, with them making the effort to attract Alibaba instead. In September, numerous U.S. small and medium-sized businesses participated in a virtual pitch event to secure an opportunity to have their products featured during Alibaba’s upcoming 11.11 Global Shopping Festival, the world’s biggest online shopping event.

Promotional board for Alibaba's Go Global 11.11 Pitch Fest

Source: Alibaba

Why is winning the Pitch Fest important for the U.S. businesses participating in the Singles' Day sales event? I would let Alibaba speak for itself:

"... selected entrants would receive hands-on advice from Tmall Global, as well as marketing resources and consumer insights to help grow their businesses. Brands will also be fast-tracked to launch on the platform under the Overseas Fulfillment program – a low-cost, low-risk way for brands to test the waters and fine-tune their go-to-market strategies before making a full-fledged entry into China. The program has allowed international companies, such as baby skincare brand Evereden, to make use of Tmall Global’s warehouses to sell to Chinese consumers without the need for a retail presence in the market."

Alibaba's cross-border e-commerce platform Kaola, which it acquired from NetEase (NTES) last year, also announced its effort in reaching out to foreign businesses. It launched a strategic upgrade in August to help overseas brands and domestic companies reach China’s burgeoning middle class. The platform said it has expanded its offices and global buyer teams in the U.S., Germany, Italy, Japan, and Australia to engage with and provide hands-on training for merchants.

Alibaba has done a great job promoting how its platforms have helped U.S. businesses. For instance, it recently highlighted how Florida-based vitamin and supplement company Totally Products joined Alibaba.com in 2015 and has since grown its international sales to more than 30 percent of his total annual revenue. This would hopefully help somewhat in shielding itself from the attacks by the rising U.S. political rhetoric.

"The demand was so high that I had to create my own catalog because of Alibaba. In the digital age, every channel is connected, so once you’re making money on Alibaba.com, people will see how successful you are and will want to do business with you, even outside of Alibaba.com. It really is a circle of success.

Additionally, the business and traffic I’ve gained from Alibaba.com has definitely increased my employees. It literally takes one full-time employee just to manage all the inquiries we get from the platform. This helps the community I’m in since I’m hiring people locally." - Daniel Rosenfield, founder of Totally Products

Alibaba's multiples remain attractive when juxtaposed with Amazon; more upside to be expected

When my article Alibaba: The Road To $300 was published in May, it was met with widespread skepticism, as reflected in the accompanying comments. I wrote then that the stock "appears to be on track to reach for $300 sometime in 2021, should the uptrend channel hold." At that time, the share price was trading around $200. Supported by the bullish market, the $300 mark was nearly hit several months ahead of expectations, when the share price rose to as high as $299 on September 1.

On Thursday, the share price of Alibaba breached $300 for real and went on to hit an all-time high of $302.61 Friday. With the stock eventually settling at $299.74 at the close, just shy of the psychologically important mark, shareholders are understandably disappointed. Nevertheless, the decent stock performance in recent months amid the myriad pressures on Alibaba Group suggests the best days are yet to come.

I laid down my argument in The Case For Alibaba Over Amazon with the following key points:

• A comparison of metrics across multiple valuation, growth, and profitability criteria revealed Alibaba wins hands down over Amazon and Netflix.
• Amazon is at a greater threat of interference from the government than Alibaba.
• The risk of monopoly-related fallout is also stronger at Amazon than Alibaba, diminishing its investment prospects.
• The home bias of American investors might have propelled Amazon's valuation too richly compared to Alibaba.

The second and third points have panned out over the past months. Just last week, the House antitrust subcommittee published its report on Big Tech, calling out Alphabet (GOOGL)(GOOG), Amazon.com, Apple (AAPL), and Facebook (FB) for their "monopoly power". Among the consequences are changes in antitrust laws that might result in business separations.

On Wednesday, U.S. House Committee on Energy and Commerce members Reps. Frank Pallone Jr. and Jan Schakowsky wrote Amazon CEO Jeff Bezos a letter on the perceived negligence by the e-commerce giant regarding the "grave safety dangers experienced while using AmazonBasics products."

After moving roughly in tandem in the three months following the publication of the article, the divergence became apparent as the share price of Alibaba held up better than Amazon during the September tech stocks swoon.

Considering the intense vitriol spilled against Alibaba in the comments section, it seemed surreal that it is up 50.1 percent since, while Amazon is up 34.9 percent. It's worth noting that the article attracted over 400 comments, a phenomenon resembling my Tesla (TSLA) write-ups, and surpassed only by another discussing the Unjustified Revulsion Towards Investing In Chinese Companies.

Data by YCharts

Looking back, I noticed the Quant rating for Alibaba then was "Very Bullish", against the "Neutral" rating for Amazon. We could say this serves as another validation of the claim by Seeking Alpha that "Quant ratings beat the market."

Source: Seeking Alpha Premium (extracted on 2020 May 11)

Fast forward to today, the quant rating for Amazon remains at "Neutral" while that for Alibaba has reversed to "Neutral" from "Very Bullish". Knowing the reliability of the quant rating, the downgrade has, of course, given me pause.

Source: Seeking Alpha Premium (extracted on 2020 October 10)

Nevertheless, looking deeper, it was apparently the valuation metrics that dragged down the value grade for Alibaba. The appreciation in the past months have outpaced the earnings growth, causing the P/E ratios to jump. However, considering that the ratios for Alibaba are a fraction of Amazon, it probably isn't much of a concern.

Alibaba's PEG on a GAAP basis is a mere 0.46 times, against Amazon's 15.74 times. I can live with a less than 40x P/E stock of a fast-growing, high potential company. At the same time, Alibaba's Price-to-Book at 7.06 times is just one-third that of Amazon's 22.33 times.

Source: Seeking Alpha Premium (extracted on 2020 October 10)

Alibaba scored lower than Amazon on momentum and EPS revisions, so let's look into those. Given the monstrous appreciation in the share price of Amazon in the past years, Alibaba certainly pales in comparison. However, for newer Alibaba shareholders, they would be pleased with the alpha achieved over Amazon. If the momentum is weighted towards more recent performance, Alibaba should have prevailed in the scoring over Amazon.

As for EPS revisions, Alibaba has again appeared weak compared to Amazon. However, I believe it's a matter of analysts being more active in their coverage on the latter. What mattered to me was the six revenue beats Alibaba achieved in the past two years, on par with Amazon. On EPS, Alibaba scored eight beats in the same period, against just five for Amazon.

Source: Seeking Alpha Premium (extracted on 2020 October 10)

Alibaba's share price looks set to repeat its 2015-2018 trading pattern rally

How likely is the share price outperformance of Alibaba over Amazon to continue? I would say there's a good chance it would do so. Alibaba's share price chart is looking interesting. I have drawn in the following chart Alibaba's multi-year price uptrend channels. If the stock just trades in the middle of the channel, the share price could hit $370 by the end of next year, an upside of 23.4 percent.

Should shareholders become bearish, the share price of Alibaba could be supported by the bottom channel which extends to $294 by the end of next year, around the current trading level. Conversely, if the stars align for Alibaba, the stock could hit $480 and beyond, the upper end of the price channel, by 2021.

The current price uptrend of Alibaba which began in early 2019 is reminiscent of its trading pattern in 2015-2018. In the following chart, I annotated the repeating pattern in a manner that looks like the Elliott wave principle. However, I am not trained in this theory and it's just a coincidence if it fits.

My point is simply on the trading pattern that seemed so similar. If it indeed pans out like in the past, Alibaba could reach for greater heights (~$400 in early 2021), suffer some correction, and then shoot for the $480 resistance by the end of next year.

Source: ALT Perspective (drawn on TradingView.com)

Analysts have been slow in bringing up their price targets for Alibaba, in contrast with Amazon where the price targets, including at the high end, have been frequently adjusted upwards since the start of the year. This is despite both companies enjoying the tailwinds from the pandemic, enabling them to ride on the boom in e-commerce and cloud businesses, among other prospering sectors the duo are engaged in.

The $400 target mentioned earlier based on the chart I have drawn is supported by the highest price target Wall Street analysts currently have on Alibaba. The $480 target, however, seemed like a tall order for now. Nonetheless, the analysts may revise their price targets as the share price of Alibaba keeps rising. Do you agree? Share your thoughts with the Seeking Alpha community in the comments field!

Data by YCharts

Analyst’s Disclosure: I am/we are long BABA, BIDU, JD, TCOM, FB, INFO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.