Chinese companies, such as China’s e-commerce heavyweight Alibaba (BABA), that are listed on the U.S. stock exchanges have grossly underperformed the broader markets in 2021. For example, BABA’s stock is down 25% in the first eight months of the year, while the S&P 500 has gained more than 20%.
Shares of BABA were already experiencing volatility after the IPO of its financial arm Ant Financial was canceled in 2020 by the country’s regulators. Alibaba was also fined almost $3 billion for its anti competitive practices, in April this year.
Recently, the Chinese government cracked down on several other tech companies including DiDi Global (DIDI) due to regulatory issues surrounding the tech space. China also announced that companies operating in the education space will not operate for profits that exacerbated this decline.
But does the ongoing pullback in BABA provide investors an opportunity to buy the dip?
Alibaba’s Q1 results
In the fiscal first quarter of 2022 (ended in June), BABA’s sales were up 34% year over year at $31.86 billion which was below Wall Street forecasts of $32.45 billion. Its operating income stood at a healthy $4.7 billion which was a significant increase compared to a loss in the March quarter due to the antitrust probe mentioned earlier. In Q1, BABA reported adjusted earnings per share of $2.54 which was higher than consensus estimates of $2.24.
BABA’s ecosystem has now attracted 1.18 billion active consumers, up by 45 million on a sequential basis. This also includes 912 million customers in China. The company’s CEO Daniel Zhang explained, “Over more than twenty years of growth, we have developed a company that spans across both consumer and industrial Internet, with multiple engines driving our long-term growth. We believe in the growth of the Chinese economy and long-term value creation of Alibaba, and we will continue to strengthen our technology advantage in improving the consumer experience and helping our enterprise customers to accomplish successful digital transformations.”
BABA’s cloud sales were up 29% at $2.48 billion and this growth was lower than expected due to a decline in sales from one of its major customers. However, this business swung to a profit of $52.5 million, compared to a loss of $171 million in the year-ago period.
Due to consistent profits, the tech heavyweight is now looking to distribute a portion of its net income to shareholders, while continuing to deploy capital to enhance merchant support and reinvest in strategic verticals. BABA has increased its share repurchase program from $10 billion to $15 billion which is the largest in the company’s history.
Alibaba stock is reasonably valued
BABA is valued at a market cap of $460 billion, which means its trading at a trailing price to sales multiple of less than 5x which is very reasonable when compared to e-commerce peers such as Etsy (ETSY) and Shopify (SHOP).
Analysts tracking the stock expect sales to touch $150 billion in fiscal 2022 and $172 billion in 2023. Comparatively, its earnings per share are also expected to improve from $10.06 in 2021 to $11.31 in 2023.
While China’s rapidly expanding middle class will accelerate the shift towards online sales in the upcoming decade, the regulatory crackdown by China makes several companies a high-risk bet. However, if you have a high-risk appetite, it could make sense to buy and hold cheap growth stocks like BABA in your portfolio, given its trading at a discount of more than 50% to consensus price target estimates.
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BABA shares were trading at $174.79 per share on Thursday morning, up $1.51 (+0.87%). Year-to-date, BABA has declined -24.90%, versus a 21.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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