Alibaba: Worth Buying The Dip
Alibaba (BABA), the Chinese e-commerce juggernaut, has been under pressure for months now. In fact, while the S&P 500 and other major averages are trading around all-time highs ("ATHs"), the company's shares are still down by about 25% from their highs achieved roughly five months ago. Alibaba also has underperformed China's benchmark average in the past months. Despite the recent "controversy," I remain very bullish on Alibaba. The stock is cheap, trading below 20 times forward EPS, and the company is set to deliver very robust revenue and earnings growth going forward. The technical image looks strong here, and the uncertainty surrounding the firm is likely more than priced by now. Therefore, I expect the company's share price can move substantially higher form here.
Source: StockCharts.com
The technical image appears quite favorable now as the stock has corrected by as much as 35%, and is still down by roughly 25% from its ATH. Moreover, we see a W-shaped bottom developing here. The stock also put in a higher high in the latest leg lower. Additionally, the RSI, CCI, and full stochastics are turning higher here, implying a likely improvement in momentum and price action going forward.
Growth Remains Abundant
Source: Alibabagroup.com
Growth remains extremely robust at Alibaba, as fiscal 2021 Q3 YoY revenue growth came in at 37% and full-year revenue growth is expected to clock in at a very impressive 39% YoY. Additionally, fiscal 2022 is anticipated to be another extremely strong year, with expected YoY revenue growth at roughly 31%. The company's cloud business continues to grow rapidly, expanding segment revenue by 50% YoY, and delivering revenues of about $2.5 billion last quarter.
Cheap Valuation
Despite Alibaba's notable size and dominant market position, the company is still growing revenues at around 30%-40%, which clearly puts it in the "growth stock" category. However, Alibaba is becoming increasingly profitable at the same time. The company's Non-GAAP EBITDA grew by over 22% YoY last quarter. Non-GAAP net income grew by about 27% and came in at over $9 billion for the same time frame. Free cash flow (Non-GAAP) expanded by roughly 23% and came in at roughly $14.75 billion for the quarter.
For fiscal 2021, Alibaba is expected to deliver $10.31 in EPS, while consensus estimates are pointing to roughly $12.02 for next year. Right now the stock is trading at around $237. This puts the company's valuation at about 23 times fiscal 2021 EPS, and just 19.7 times fiscal 2022 EPS projections. This is extremely cheap when we consider that the company is expected to grow full-year revenues at about 39% this year, and by 31% in fiscal 2022. Also, 2021 YoY EPS growth is expected to be around 27%, putting the company's PEG ratio at about 0.85, extremely cheap for a company growing YoY revenues by over 30%.
Why Alibaba is Undervalued
If we compare Alibaba to some of its competitors, we can see just how cheap the stock really is right now.
Alibaba - forward P/E (fiscal 2022): 19.7, forward revenue growth: 31%, PEG: 0.85.
Tencent (OTCPK: TCEHY) - forward P/E: 33.6, forward revenue growth: 25%, PEG: 1.43.
JD.com (JD) - forward P/E: 30, forward revenue growth: 20.7%, PEG: 1.9.
Baidu (BIDU) - forward P/E: 20.9, forward revenue growth: 13.9%, PEG: 1.25.
Amazon (AMZN) - forward P/E: 47.2, forward revenue growth: 17.6%, PEG: 4.3.
The Takeaway
Alibaba's forward P/E ratio is notably lower than most of its nearest competitors. One exception is BIDU, but Baidu's revenue growth is nowhere near as impressive. Essentially, we see that Alibaba has the lowest forward P/E, the highest revenue growth, and the lowest PEG ratio. So, valuation wise it is best all around. To be fair, Amazon is expected to grow revenues much more rapidly in 2022 than this year, which should lower its future PEG ratio to around 1.25 (using current share price).
Why Alibaba is So Cheap
The market may be mispricing Alibaba due to China's "crackdown" on the tech giant. The Chinese government appears to be looking in on the growing influence of China's tech titans and their monopolistic tendencies. Recently, Chinese authorities asked Alibaba to sell its media holdings, and the government is also ramping up its financial requirements due to Alibaba's financial arm, Ant Group Co.
So, this could be the primary reason why Alibaba is so cheap right now. However, before investors start to dump Alibaba shares, I think it's important to put things into perspective. Alibaba used to be China's most valuable company and is now second to only Tencent. Now, the authorities in China may want to curb the company's influence, but it's unlikely that they want to create major ripples in their marketplace.
Any unjust or detrimental actions against the company would shine an extremely unfavorable light on the Chinese government. Moreover, it could stifle investment into the Chinese economy and may cause a steep selloff in the Chinese stock market. It's not likely that the authorities want this, thus the government is likely to tread lightly regarding Alibaba.
The Bottom Line
While Alibaba is being probed by the Chinese government, its share price is under pressure. In fact, the company is trading at under 20 times next fiscal year's consensus EPS projections, is anticipated to grow revenues by 30%-40% (fiscal 2021, and 2022), and has a PEG ratio of about 0.85. If Alibaba sported a similar P/E ratio to Tencent, the company's share price would be 70% higher than it is right now. A 70% increase from its current level would put Alibaba's share price at around $400. It seems quite likely that the impact from the government's probe is going to be transitory and limited in nature. Therefore, this is likely a very attractive time to go long Alibaba, as the stock is likely to appreciate considerably over the next several years.
Disclosure: I am/we are long BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SA). I have no business ...
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