Perhaps one of the hardest-hit mega-cap stocks in the market of late, Alibaba (BABA) is a growth stock that has really been under pressure.
Listed on the NYSE, Alibaba is actually a Chinese e-commerce conglomerate, with an interesting business model and a set of unique growth drivers relative to its other U.S. peers.
Unlike U.S. growth stocks that are now under pressure from rising interest rates, this Chinese tech stock is enjoying a declining rate environment, as the Chinese government looks to stimulate growth.
To be sure, the global economic growth outlook appears to be depressed, as COVID-19 shutdowns and other macro factors weigh on the outlook for growth across many core industries.
However, Alibaba’s core business and China-centric business is one many long-term growth investors believe will likely outperform, relative to U.S. peers.
That’s not to say the Chinese economy is without near-term headwinds. Far from it. Chinese economic growth and retail sales numbers have disappointed of late.
Accordingly, U.S. investors have largely focused on the near-term outlook for companies like Alibaba rather than their long-term prospects.
This has led to a fast-declining share price in recent months. In fact, over the past year, Alibaba stock has dropped more than 50%. Other regulatory headwinds stemming from late 2020 into 2021 have further impacted investors’ willingness to invest in anything China-related.
That said, I’m bullish on Alibaba’s long-term prospects.
Interest Rate Cuts a Big Deal
The recent move by China’s central bank to cut key lending rates is a big deal. As one of the largest companies in China, and among the largest e-commerce players globally, the interest rate environment for Alibaba really matters.
As a U.S.-listed stock, Alibaba appears to be getting hit hard from two ends. On the one hand, higher interest rates in the U.S. lower demand for all equities, of which Alibaba can be included among the top stocks in certain indices. On the other hand, Alibaba’s geopolitical risk, being based in China, is also being factored into this company’s valuation.
Thus, it’s understandable why the market is so bearish on Alibaba right now.
However, these interest rate cuts should be viewed positively by long-term investors. Those concerned about Chinese growth ought to like the view from China’s central bank in looking to stimulate the economy.
For those concerned about U.S. interest rate hikes, declining rates in China should also provide a hedge. Alibaba’s already low valuation looks a heck of a lot more attractive in this macro context.
Fundamental Analysis
Alibaba is set to report earnings shortly, which will be highly anticipated for a number of reasons. This fiscal Q3 report will show how Alibaba performed during the important Christmas holiday shopping season (as well as Single’s Day, two very important holidays in China).
However, looking purely at Alibaba’s fundamentals in advance of these earnings, it’s clear this growth stock is one that’s extremely undervalued.
Looking at Alibaba’s forward price-earnings-to-growth (PEG) ratio, this company is certainly under-appreciated by the market. Estimates are that Alibaba currently trades around 12.5-times forward earnings.
On an absolute basis, that’s cheap. However, when one considers this stock’s forward-looking growth rate remains around 31%, this implies a forward PEG of around 0.4.
A good rule of thumb is that growth stocks with a valuation multiple less than their growth rate (a PEG less than 1) are trading at very reasonable valuations. A PEG of 0.4 indicates that the market has lost all faith in the ability of Alibaba to grow long term.
Thus, it’s easy to make the argument Alibaba is one growth stock trading at one heck of a discount right now.
Wall Street’s Take
According to TipRanks’ analysts rating consensus, Alibaba is a Strong Buy. Out of 23 analyst ratings, there are 20 Buy recommendations and three Hold recommendations.
The average Alibaba price target is $190.46. Analyst price targets range from a high of $250 per share to a low of $140 per share.
Bottom Line
On a value basis alone, Alibaba is a company worth considering. For those factoring in any sort of meaningful growth over the medium term, this stock is a no-brainer.
Of course, uncertainty with respect to geopolitical risk and market-based risks are likely to remain for some time. Alibaba, like all companies, can’t avoid that.
However, once the market starts to recognize the value Alibaba is displaying right now, there’s a good chance this stock could go on another run. The numbers don’t lie, and in Alibaba’s case, the numbers certainly look very attractive right now.
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