If you’re hesitant to venture into the turbulent waters of China’s renowned e-commerce giant Alibaba (NYSE: BABA) currently, it’s quite understandable. The stock has been lackluster since 2021, plagued by a plethora of challenges such as a severe regulatory crackdown and persistent economic frailty in its primary market. It hovers not far from its multiyear low recorded in late 2022.
However, have you pondered whether many investors are overly fixated on Alibaba’s disappointing history, neglecting the brighter prospects that lie ahead? If so, could Alibaba stock potentially present a compelling buying opportunity?
The Trials and Tribulations of Alibaba
If you are perusing this piece, you are likely familiar with the entity. Alibaba, the parent company of China-centric e-commerce platforms Taobao and Tmall, also presides over a logistics venture named Cainiao, a cloud computing arm, and several digital entertainment ventures. Nevertheless, its primary revenue stream remains its e-commerce offerings.
What caused the downturn starting in 2021? Beijing’s oppressive directives certainly did not help. Moreover, following the surge in online shopping observed in 2020 was a tall order.
China’s protracted COVID-19 lockdowns exacerbated economic woes more than in other regions, culminating in a mere 5.2% GDP growth last year. This growth stands as China’s feeblest economic expansion in years, excluding the initial pandemic phase.
It is crucial to acknowledge that Alibaba has grappled with an identity and operational quandary since founder Jack Ma relinquished the chairman position in 2019. The corporation has executed major leadership changes on multiple occasions since then, scrapping plans to divest major divisions twice. Notably, the latest move in March involved retaining the logistics segment and refurbishing it to fortify the e-commerce operation.
While these decisions may ultimately prove prudent, the vacillation could instill trepidation.
The business itself, as well as the economic milieu it navigates, may have reached an inflection point. Consequently, the struggling stock could undergo a similar transformation, especially given its valuation at less than 10 times its historical and anticipated earnings per share.
Alibaba’s Renaissance: Awaiting the Promised Vision
Do not misinterpret the message: risks undoubtedly abound. Yet, the underestimated potential rewards stem from various factors.
Firstly, China’s existing and projected economic expansion becomes salient. Although diminished from last year’s lackluster performance, the International Monetary Fund recently revised the country’s annual growth forecast from 4.6% to a robust 5%. While the industrial sector primarily fuelled this resurgence, Chinese consumers exhibit a willingness and capacity to contribute. Retail expenditure in the country has displayed consistent year-over-year growth since January 2023.
This favorable tailwind coincides with the appointment of a leadership team enunciating Alibaba’s protracted trajectory after CEO Eddie Wu assumed leadership in September. Chairman Joe Tsai (concurrently appointed in September) remarked, “Eddie’s leadership of both Alibaba Cloud and TTG [Taobao and Tmall Group] will ensure total focus on, and significant and sustained investment in, our two core businesses of cloud computing and e-commerce, as well as enabling TTG to transform through technology innovation.”
Scrutinize the nuances. This represents the anticipated company and leadership cohort. Wu’s decision to retain the logistics sector in-house poses challenges, yet overcoming this obstacle could yield substantial returns by enhancing Tmall and Taobao’s marketability. Alibaba’s retention of the cloud division anticipates leveraging the redoubtable growth in the artificial intelligence sector.
Unveiling the Path Ahead
The grand irony persists as the stock continues to underperform, primarily due to investors failing to discern the analysts’ projections. These forecasts entail robust revenue expansion until 2026, coupled with even more buoyant growth in earnings per share.
Data source: StockAnalysis.com. Chart by author. Figures are in Chinese yuan.
Analysts collectively opine that the American Depository Receipt (ADR) variant of this stock bears a value exceeding its current price by 40%. The stock trading at less than ten times the anticipated 2024 earnings likely contributes to this sentiment.
Hence, the lingering question: Why does the stock grapple with such turbulence?
As previously highlighted, this scenario reflects one of those familiar instances where the market is acclimated to a company grappling with challenges, making it arduous to envision the organization surmounting its hurdles. Nonetheless, Alibaba is poised to do just that. A few more successful quarters are required to convince a critical mass and incite a rally in the stock. Subsequently, substantial and protracted gains may materialize.
This tidbit might enlighten: Billionaire investor David Tepper’s Appaloosa Management acquired 6.9 million Alibaba shares during the initial quarter, augmenting the position to become the most significant holding in the fund. Tepper’s move might suggest he perceives or discerns something eluding numerous others concerning Alibaba’s current scenario.