I Was Wrong About Alibaba Stock

Summary

• Shares of Alibaba keep dropping. The e-Commerce firm’s market value hit a new one-year low last week.
• The theme of ‘common prosperity’ is repelling non-Chinese investors. However, Alibaba is poised to grow rapidly in e-Commerce and related fields, like logistics, until FY 2025.
• Strong projected EPS growth implies that the market may be wrong about Alibaba’s commercial prospects in the long term.
• While I have been wrong about Alibaba short term, I plan on holding the e-Commerce firm for a long time.

Shares of Alibaba continued to make fresh lows last week, not because Beijing unleashed new regulations on Chinese e-commerce companies, but because buyers are too afraid to jump in. Long term, Alibaba offers deep e-commerce value and discounted EPS growth!

‘Common prosperity’

No phrase scares the living hell out of non-Chinese investors more than the phrase of ‘common prosperity’. The concept of a shared prosperity, or redistributed wealth, has deep roots in China’s political life and culture… and the Chinese Communist Party used it as justification for a widening crackdown on the economy in 2021. Beijing has targeted financial institutions that offer cryptocurrencies, e-commerce businesses, ride-hailing companies, education enterprises, to name a few… and the CCP even went so far as to limit the amount of time Chinese children can play video games.

Beijing’s tightening intervention has eradicated hundreds of billions of dollars in market value from Chinese companies… including companies that were not directly affected by Beijing’s regulatory countermeasures… the EV sector comes to mind here.

It is not only that Beijing targets firms that have seemingly run afoul of economic fair play rules – like Alibaba, which was fined $2.8B in a landmark anti-trust case this year – that irritates the market. It is also the heavy-handed, authoritarian approach the CCP uses to consolidate control and insert itself as a stakeholder into major Chinese companies. A case in point: Alibaba’s founder, Jack Ma, disappeared from public life for a few months at the end of 2020, which fueled speculation that Chinese authorities were involved. In October 2020, the China Securities Regulatory Commission even went so far as to delay the IPO of Ant Group, which is part of Alibaba and most known for its Alipay digital payments platform, in an alleged attempt of retaliation against e-commerce billionaire Ma.

These actions show that the CCP means business and Chinese firms go out of their way to limit the fallout. Because of tightening regulation, Alibaba has lost 50% of its market value since the crackdown started a year ago. Big tech, social media and e-commerce firms have been the biggest losers so far.

Despite a clouded short-term outlook and higher uncertainty, however, Alibaba offers deep long-term e-commerce value. China is the biggest e-commerce market worldwide and is expanding rapidly into other South-East Asian markets with e-commerce retail brands like Shopee and Lazada. Global e-commerce volumes surged during the pandemic and the market outlook is great: Global e-commerce sales are projected to grow 56% from 2020 to 2023 to $6.5T, according to Oberlo… and a big winner is going to be Alibaba which has already amassed a 1.18-billion strong customer base.

(Source: Oberlo)

China plays a unique role in the global e-commerce market. While the Chinese economy is developing rapidly and showing advanced status in fields like robotics or artificial intelligence, China is still the world’s largest exporter of goods and services. In 2020, retail e-commerce purchases in China were three times higher than the volume in the U.S. – 2.3T for China compared to $795B for the U.S. – which makes China the world’s largest e-commerce market. Most cross-border transactions, however, are initiated from markets in North America and the United Kingdom.

(Source: Practical e-Commerce)

The pandemic fueled Alibaba’s growth in many different ways. Order volumes surged during the COVID-19 outbreak, leading to record results in Alibaba’s retail and wholesale e-commerce businesses. Alibaba’s e-commerce revenue growth in the second-quarter surged 35% year over year to 180.2B Chinese Yuan ($27.9B) while logistics revenues surged between 23% and 50%, depending on location.

(Source: Alibaba)

Despite short-term clouds gathering over Alibaba, the e-commerce firm is set to grow rapidly in the future… and the market is heavily discounting Alibaba’s commercial prospects due to the ‘common prosperity’ phrase. Alibaba is expected to generate $141.8B in sales this fiscal year (the year ending in March 2022) and $170.8B in revenues the following year, indicating 20% year over year growth. By FY 2025, Alibaba’s sales are expected to have grown to $268.9B, implying an annual revenue growth rate of 17%. Alibaba’s EPS, however, is expected to grow at 18% annually over the next four years, and faster than sales.

Estimates provided by Seeking Alpha

The average stock price target for Alibaba on Tipranks is $247.67 which gives BABA approximately 72% upside. The highest forecast calls for the stock price to go to $330 over the next 12 months while the lowest prediction implies a stock price of $190. So, even in the low case, shares of Alibaba have 32% upside!

(Source: Tipranks)

Based off of an EPS estimate of $11.1 for next year, Alibaba trades at a P-E ratio of 13. Last year’s P-E ratio, when the market solely evaluated Alibaba’s prospects for earnings growth, was above 30.

Risks with Alibaba

The risks for Alibaba chiefly relate to the practices of the CCP. New crackdowns, especially in the e-commerce sector, could expose Chinese firms to new fines and add pressure on Alibaba’s already bruised valuation. However, I also like to think that missing out on the enormous Chinese e-commerce market and Alibaba’s strong EPS growth is an even bigger risk. What would change my opinion on Alibaba is if the CCP forced the e-commerce firm to sell parts of its business, like the digital payments platform. A deeper involvement of the CCP in Alibaba’s business would indicate negative returns for the stock.

Final verdict

Because shares of Alibaba continued to drop last week, I was wrong to buy more. But I believe I am only wrong in the short-term. Longer term, I believe the market will vindicate my bullish opinion on Alibaba and reconsider the firm’s e-commerce possibilities and fast EPS growth. With sales and EPS expected to grow 17-18% annually until 2025, Alibaba is more than just undervalued.

Author: The Asian Investor, Seeking Alpha