November 5, 2024

Is It Time to Invest in Alibaba Stock After Its 25% Surge?

Alibaba Stock Has Soared: Is It Time to Buy?

After enduring a prolonged malaise, Alibaba Group Holding stock is staging a comeback, ignited by China’s recent stimulus plans. But is it too late to buy in? With the stock already up 25% to $98.70 over the past three months, there are valid concerns about whether investors are arriving late to the party.

The Economic Context

It’s critical to recognize that the current climate feels anything but promising for China-based stocks. Since the start of 2024, China’s total retail sales have crept upward less than 1%, and the nation’s economy is so beleaguered that Beijing has just rolled out its most significant stimulus package since the pandemic. This new plan includes lower short-term interest rates and reduced cash-reserve requirements for banks, but it raises questions about the real efficacy of such measures. There’s little indication that this stimulus will successfully tackle the persistent issues facing the country, particularly its crumbling property market.

Government Intervention: A Double-Edged Sword

Nonetheless, the fact that China’s government is willing to intervene suggests a determination to reignite economic growth. Even if this latest effort falls short, their involvement lays a foundation that could stabilize consumer sentiment. Furthermore, while regulatory scrutiny has historically stunted growth in China’s tech sector, the possibility of a more favorable operating environment for companies like Alibaba is worth noting. As a leading e-commerce and cloud service provider, Alibaba stands to reap benefits from both recovery and stability.

Valuation Perspective

Alibaba’s current valuation is compelling. Trading at just 10.7 times forward earnings, it is relatively inexpensive compared to its historical averages and its competitors. Senior Portfolio Manager Burns McKinney from NFJ Investment Group is optimistic, stating, “Alibaba is cheap relative to its own history, it’s cheap relative to its peers, it’s sitting on a ton of cash and generating more cash by the day.” This assessment becomes even more critical when considering that some analysts believe the stock could reach a price of $138, offering investors a potential 40% upside, or as high as $145, which translates into nearly a 50% increase.

Growth Potential

While concerns about the Chinese consumer linger, recent signs indicate that Alibaba’s core commerce business is regaining market share, as noted by Baird analyst Colin Sebastian. He rates the stock as “Outperform,” providing a glimmer of hope for investors questioning Alibaba’s resilience. Earnings-per-share growth is projected to resume next year, with anticipated growth of 12.5% year-over-year, marking the company’s strongest period of EPS growth since 2021.

Cloud Opportunities

The real growth story for Alibaba may lie in its cloud services. As the largest public cloud service provider in China and the Asia-Pacific region, Alibaba’s cloud revenue—which currently represents a little over 10% of total revenue—has the potential to act as a robust growth driver. Investors previously saw Alibaba’s core retail business valued at 10 times earnings, along with its $20 billion net cash position. Even following its recent stock upswing, the cloud business remains undervalued.

A Shift in Corporate Strategy

Let’s also not forget that Alibaba is not the same company it was four years ago. The pressures of China’s economic slowdown have compelled it to abandon its previous “growth-at-any-cost” mentality. Instead, the company has shifted to returning capital to shareholders, a policy that should resonate well with conservative investors. They’ve already repurchased roughly $10 billion of their shares this year, with an additional $26 billion left in authorized buybacks on the table.

The Road Ahead: Caution and Potential

Despite the positive developments, the path ahead for Alibaba stock may not be smooth. The stock will undoubtedly react to every piece of data and policy announcement out of China. While 84% of analysts remain bullish, the average price target lingers at just $118. Nonetheless, failing to acknowledge the potential for growth among a rejuvenated Chinese middle class would be a significant oversight; the rebound in consumer spending is more a question of ‘when’ rather than ‘if’.

Final Thoughts

Alibaba represents a microcosm of the broader Chinese economy—it’s not in decline, merely maturing. For traditional and conservative investors, striking a balance between risk and opportunity seems prudent. The case for Alibaba stock remains strong, making it a compelling option for those ready to navigate these uncertain waters.

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