Alibaba stock (NASDAQ:BABA) could present a compelling buying opportunity prior to reporting its fiscal Q1 results, with its valuation currently hovering at rather depressed levels. At $91.90, shares have certainly rebounded notably from their 52-week low of $58. That said, shares have yet to catch up with Alibaba’s financial developments, still trading at the low end of their five-year range. In fact, Alibaba stock is still trading at the same levels it did back in 2014 when it IPOd on the NYSE.
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Despite Alibaba shareholders experiencing virtually no gains for nearly a decade, the company has been growing its operations, revenues, and profits. As a result, the stock’s undervaluation gap has been slowly enlarging. While there are certainly some risks attached to Alibaba’s investment case, it has become increasingly hard to ignore this potential opportunity. Accordingly, I am bullish on the stock.
Persistent Growth Despite Geopolitical Concerns
Over the years, Alibaba has found itself in a very shaky geopolitical landscape. This has been the most prominent reason for the stock’s protracted underperformance.
Do you remember back in November 2020 when Chinese regulators halted the IPO of Alibaba’s financial affiliate Ant Group due to unease over regulatory compliance only after Alibaba founder Jack Ma criticized China’s regulatory system? Or how about when Jack Ma ended up disappearing for months, a while after? Investors don’t want to have anything with such foreign-related drama, which is why many avoid touching the stock with a 10-foot pole.
That said, outside of the politics and drama involved, Alibaba’s actual performance has been nothing short of impressive. The stock may still be trading at the same levels it did back in 2014, but its revenues have grown by a massive 15x during this time. Specifically, in Fiscal 2014, Alibaba reported revenues of $8.45 billion. For its Fiscal 2023, which ended this past March, Alibaba reported revenues of $126.5 billion! The company’s net income also has expanded from $3.7 billion to $10.6 billion during this period.
Alibaba’s Valuation Gap Has Been Widening
Clearly, Alibaba’s growth in revenues and profits against a stagnated stock price has resulted in an ever-widening valuation gap. To be more precise, its forward P/S and P/E multiples have shown a gradual compression over time. In 2015, these multiples stood at approximately 13x and 31x, while in 2019, they had been reduced to around 6x and 25x. Today, the multiples have further contracted to a remarkable 1.8x and 10.8x.
This prompts the thought-provoking question: how much further can Alibaba’s valuation decline? Will we witness a continued widening of this undervaluation gap, eventually resulting in the stock trading at 8x, 6x, or even 3x earnings?
Of course, nobody can really answer this question. However, there is a point at which Alibaba stock will have to bottom. In my view, Alibaba may indeed have bottomed at the current multiple of just ~11x, especially when considering the company’s underlying earnings growth. Specifically, Wall Street analysts project EPS growth of at least 10% per annum through Fiscal 2026.
Not many companies trade at a P/E in the low teens while the market expects their earnings to grow in the double digits over the next three years, especially with the underlying moat and market-leading position Alibaba has. This illustrates the stock’s undervaluation.
Another noteworthy perspective is the comparison to the S&P 500 (SPX), where EPS growth is projected to be a mere 2% this year. Surprisingly, despite this sluggish growth, the index trades at a P/E ratio exceeding 23, further highlighting Alibaba’s attractiveness and undervaluation in the market.
Growing Share Repurchases to Combat Undervaluation, Grow EPS
Alibaba’s management is well aware of the steep discount Alibaba’s stock is trading at. In turn, they have decided to combat the stock’s undervaluation through growing share repurchases. Specifically, during Fiscal 2023, Alibaba repurchased a record $10.9 billion worth of stock, around $1.2 billion more than in Fiscal 2022.
Share repurchases are a great strategy by management, as they don’t only help stabilize the stock price but also should meaningfully contribute to Alibaba’s EPS growth. At such low valuation levels, Alibaba can inexpensively buy back and retire a significant chunk of stock, reducing the share count and boosting its per-share metrics. In fact, Alibaba has already reduced its share count by roughly 5.5% since last summer.
Is BABA Stock a Buy, According to Analysts?
Regarding Wall Street’s sentiment, Alibaba Group Holding features a Strong Buy consensus rating based on 13 Buys and one Hold assigned in the past three months. At $142.71, the average BABA stock price target implies 56.33% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell BABA stock, the most accurate analyst covering the stock (on a one-year timeframe) is Rob Sanderson from Loop Capital Markets, with an average return of 15.79% per rating and a 60% success rate.
The Takeaway
Alibaba could present a compelling buying opportunity as its stock continues to trade at depressed levels despite the company’s continuous financial advancements. While geopolitical concerns have weighed on the stock’s performance, investors should not overlook Alibaba’s impressive financial track record.
The widening valuation gap, coupled with the company’s strategic share repurchases, suggests that the stock may have finally bottomed out. With anticipated double-digit earnings growth and an attractive P/E ratio, Alibaba’s undervaluation becomes even more apparent when compared to the broader market. I will thus continue holding my shares tightly and remain bullish on Alibaba.
