Over the past month, Chinese e-commerce giant Alibaba (NYSE:BABA) has seen one of its biggest stock price rallies ever. The well-known reason for the rally is the barrage of good news flowing in from China. The big question now lingering in investors’ minds is if the stock is still a Buy. Based on the analysis below, I believe the stock presents a good investment opportunity. With the revival of China, BABA stock should revive too.
China Reopening Will Act as a Catalyst
Last month, beleaguered Chinese stocks got a fresh lease of life, witnessing their biggest rally in the last two decades. A number of positive news triggered the rally.
Massive countrywide protests throughout China forced the Chinese government to relax the zero-COVID policy and travel restrictions imposed during the pandemic.
Simultaneously, talks between U.S. President Joe Biden and Chinese President Xi Jinping have given signs of easing tension between the two nations. With that, the ever-growing concern of the delisting of Chinese stocks from the U.S. stock market is also put to rest.
The much-awaited reopening of the Chinese economy and the final exit from its zero-COVID policy bodes well for all the Chinese stocks listed overseas.
BABA: Strong Fundamentals with Increased Buybacks
Founded in 1999, Alibaba is the biggest Chinese multinational technology company specializing in e-commerce, retail, technology, and the internet. Despite its gigantic stature, the stock massively suffered over the past two years due to the negative impact of widespread shutdowns caused by the zero-COVID policy in China, the China-U.S. trade war, corporate governance concerns, slowing GDP growth, the regulatory crackdown in the Chinese tech sector, and delisting threat of Chinese stocks from the U.S. exchanges.
No wonder, the stock took a downward slide from its October 2020 high of more than $300 to its low of $58 in October this year. Thanks to the recent good news, the stock has recovered by almost 30% over the past month and is trading around $91.
On November 17, BABA reported mixed Q3 results with upbeat earnings but a revenue miss. Reduced consumer spending resulted from an overall dull economic outlook and COVID-19 lockdowns, further impacting logistics and sales.
Despite a tough environment, the company continued to make impressive share buybacks worth $18 billion under the existing $25 billion share repurchase program. Further, the board announced another $15 billion in share buybacks effective until FY2025. The combined buybacks of $40 billion equate to 16% of the current market capitalization of $240 billion.
The huge buybacks are a clear indication of the company’s confidence in the return to growth, as well as the fact that the shares are undervalued at current levels. The buybacks are further supported by a sturdy balance sheet with cash and cash equivalents of $68 billion at the end of September 30, 2022.
Over the years, Alibaba has used its gigantic market share to its advantage. It has diversified across multiple sectors, like its Cloud business, among others. The tech sell-off this year has not favored the stock. Longer term, however, the company should see the fruits of its diversification initiatives.
In terms of valuation, too, Alibaba looks attractive. Trading at a huge 50% discount to its own five-year historical forward P/E average of 24x, BABA’s current forward P/E ratio is hovering around 12x.
The discounted valuation potentially presents a great buying opportunity for BABA, given the solid fundamentals and return to growth driven by a revitalized Chinese economy.
Is Alibaba Stock Expected to Rise?
The Wall Street community is clearly optimistic about the stock. Overall, the stock commands a Strong Buy consensus rating based on 15 unanimous Buys. Alibaba’s average price target of $133.73 implies 47.1% upside potential from current levels.
Concluding Thoughts: BABA Looks Attractive
There are still concerns over shrinking Chinese exports impacted by weak global macroeconomic sentiment. The complete reopening of the Chinese economy may take a few months. Ultimately, it will happen nonetheless. This should take Chinese stocks and the market leaders like BABA to their pre-historic highs. Likewise, I am bullish on BABA stock and its return to growth thesis.
