Alibaba: We've Reached The Bottom, The Time To Buy Is Now
Summary
- There’s an indication that the political pressure from Beijing against Alibaba is likely going to ease in the following quarters.
- Alibaba has more than enough catalysts that should help it to create additional shareholder value in the foreseeable future.
- We believe that Alibaba’s stock has reached its bottom and recently we opened a long position in the company.
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Alibaba’s (NYSE:BABA) stock went for a rough ride in recent months, as the company was accused of supposedly abusing its market dominance and was fined $2.8 billion by Chinese regulators. However, we believe that as the fine is finally paid, the political pressure is likely going to ease in the following quarters. At this stage, the company has become too big to fail, as it’s entrenched in the lives of nearly every Chinese citizen, and regulating it even more is not going to be beneficial for the Chinese authorities in the long term. For that reason, we believe that Alibaba’s stock has finally reached its bottom and at the current prices, it’s a solid buy, especially since the company has more than enough catalysts that should help it to create additional shareholder value in the foreseeable future.
China Rising
Alibaba is the biggest eCommerce company in Asia and a dominant leader in the cloud computing and digital media fields in the Asia-Pacific region. In recent quarters, all of Alibaba’s marketplaces showed stellar growth despite the pandemic, yet its stock is down over 20% since our bullish article on the company was published in June.
Chart: Seeking Alpha
The decline is due to China's regulatory crackdown, which started last year when the company was accused of supposedly abusing its market dominance and was fined $2.8 billion. Alibaba has already paid the fine and in reality, it wasn’t significantly impacted, as its net income in FY20 was down only by less than 1% Y/Y to $22.94 billion. In addition, record revenue of $109.47 billion was achieved last fiscal year, which represents a growth of 52% Y/Y. Other than the fine, no additional major actions from the Chinese authorities were taken against Alibaba so far.
The crackdown also hasn’t significantly affected the company’s performance in Q1. Just earlier this month Alibaba announced that in Q1 its revenues increased by 34% Y/Y to $31.87 billion, while its net income increased by 10% Y/Y to $6.73 billion. On top of that, the company’s mobile MAUs at the end of the quarter stood at $939 million, up by 14 million Q/Q. Currently, Alibaba is on its way to reach 1 billion mobile MAUs this year, which will mean that ~70% of the Chinese population will be using one of Alibaba’s apps on a monthly basis. In addition, at the end of Q1 Alibaba recorded 1.18 billion annual active consumers across all of its marketplaces, out of which 912 million were from China, while the rest were international consumers.
Considering such a great performance and the fact that Alibaba has paid the fine, we believe that the company will no longer be prosecuted back at home. One of the reasons why we think like that is because Alibaba is too entrenched in the lives of nearly every Chinese citizen and regulating it even more will lead to negative consequences for the Chinese government itself. Let’s not forget that China has a goal of creating a digital platform economy in the next few decades, and it’s unlikely to do so without the help of its biggest tech behemoths. Therefore, we believe that the political pressure will ease in the following quarters.
At this stage, the US-China trade war is a bigger threat to Alibaba in our opinion than domestic regulations. The possible implementation of new tariffs between two of the biggest economies in the world will lead to trade disruption and will make imports and exports of a wide range of goods unprofitable for many businesses and entrepreneurs in both countries. Considering that Alibaba’s main marketplace is full of international buyers, the potential trade war is likely going to negatively affect its top and bottom-line performance. Other than that, we don’t see any major risks that could disrupt Alibaba’s business at this stage.
One of the biggest advantages of Alibaba is that despite the recent setbacks, it has also been aggressively improving its services and expanding in other fields, which should help it to continue to grow its business back at home and abroad. Its Taobao app recently became the largest social commerce platform in the country, while its latest initiative Taobao Deals will help to deliver more high-quality goods for Chinese consumers. In addition, Alibaba has also recently added the option of same-day delivery and next-day delivery in different regions, which should help it to accelerate the number of domestic users that use its marketplaces. On top of that, Alibaba continues to increase the number of companies in which it invests, it has also recently even opened an NFT auction platform, and it continues to grow its top and bottom lines at a double-digit rate, which is something that’s hard to do for a company of such size.
In addition, Alibaba, as the biggest eCommerce company in Asia, is also likely to benefit from the growth of the Chinese economy in the following years. Let’s not forget that China became the only country, which experienced a growth of its economy in 2020 despite the pandemic, and in the first half of the current year, its GDP already increased by 12.7% and is expected to increase by a total of 8.5% for the whole year. Also, the Chinese economy is expected to surpass the US’s economy by around 2028, while the country’s middle class is likely going to be bigger than the whole population of the US by that time. As a result, it’s safe to assume that the demand for various goods that could be purchased online is only going to increase, as all the industries slowly begin to digitize in the region. Considering this, it’s safe to say that Alibaba has more than enough opportunities to create additional shareholder value in the following years.
Another major advantage of Alibaba is that it has a solid balance sheet, which will help it to continue to fund its growth in the following years. At the end of Q1, the company had $74.84 billion in liquidity and only $20.7 billion in long-term debt. It’s also expected to generate a record revenue of ~$142.13 billion in FY21, and the growth is also likely to accelerate in FY22 to $171.89 billion in revenues.
Source: Seeking Alpha
On top of all of that, Alibaba still has strong backing from institutional investors, who own over 40% of the company’s shares, while the street continues to be overwhelmingly bullish on the stock and gives it a consensus price target of $276.04 per share, which represents an upside of ~70% from the current market price. In addition, due to the recent depreciation, Alibaba now trades only at 3 times its sales and could be considered significantly undervalued at the current levels, especially since it has more than enough catalysts that should help it to create additional shareholder value in the following years.
Takeaway
We stick to our opinion that at the current prices Alibaba is a solid buy, as growth opportunities continue to outweigh the political risks. Although the Chinese government has leveled the regulatory field for its domestic tech companies, Alibaba is likely going to comply with the updated rules and will be able to survive and thrive in the new tech-regulated reality. At worst, Alibaba will be required to share the access to its flow of data with Beijing and in exchange, it will be able to continue growing its business, which will lead to the appreciation of its stock in the long term. For that reason, we decided to buy Alibaba’s stock, as we believe that it has finally reached its bottom and it has more than enough upside at the current levels.
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Disclosure: I/we have a beneficial long position in the shares of BABA either through stock ownership, options, or other derivatives. 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.