A series of government regulations have dealt a massive blow to Chinese tech companies, including Alibaba (BABA).
These recent regulatory policies stemmed mainly from antitrust and data security concerns. The massive crackdown on China’s tech sector has erased more than $1 trillion in market value from all the globally listed Chinese stocks.
Alibaba stock has suffered an incredible decline, and is currently down 47% from its all-time high of $319.32, reached last October. However, this wasn’t the only Chinese tech giant to have seen such declines. Other affected tech giants include Tencent Holdings Ltd. (TCEHY), DiDi Global Inc. (DIDI) and more.
What a difference a week can make. Since hitting lows of $152.80, Alibaba stock has rebounded nearly $10 per share to close above $162 on Monday. (See BABA stock charts on TipRanks)
Can this run continue? Let’s take a look. I’m bullish on the stock.
Alibaba Shows Strong Growth
From a fundamentals perspective, things are certainly looking bright for Alibaba stock.
Alibaba announced quarterly profit growth of 22% in the company’s Q1 FY2022 earnings report. This report also saw Alibaba grow its revenue 34% year-over-year, to $31.9 billion this past quarter. The company has more than 1.18 billion active users worldwide, having added 45 million more users this past quarter. For a company that’s absolutely dominant in Asia, these are certainly impressive results.
However, that’s not to say things have gone smoothly on this front. During the company’s fourth quarter earnings release earlier this year, Alibaba missed earnings expectations, largely due to a massive $2.8 billion fine imposed by the CCP. That said, revenue growth has continued to show strength, highlighting the potential undervalued nature of this beaten-up tech stock.
Cloud computing revenues grew 29% year-over-year in Q1. For Alibaba, the fourth-largest cloud computing player in the world, this is a very good thing. Investors looking to value Alibaba like an Amazon (AMZN) will note that Alibaba’s valuation is roughly one-third that of Amazon, by various metrics.
Alibaba Stock is Moving Higher
Most Chinese tech stocks have been trading at extremely compelling valuations due to these regulatory curbs. Some believe this dip is too juicy to ignore. However, others simply don’t want to touch Chinese stocks until this era of hyper-regulation ends (if it ever does).
For now, investors seem content to buy Alibaba shares on this improved risk-reward outlook. Bulls contend that most of the risk with Alibaba stock is already priced in. After all, this is a stock that has more than tripled its top and bottom lines over the past four years, but now trades at the same level it did four years ago. This sort of valuation depression can’t last forever. Or, at least, bulls hope so.
Given the uncertainty surrounding Chinese stocks of late, nothing is off the table. For now, many investors seem to be happy owning this long-term stock at these levels, and waiting out the turmoil.
Wall Street’s Take
According to TipRanks, BABA stock is a Strong Buy. Out of 23 ratings, there are 21 Buys, one Hold and one Sell.
The average BABA price target is $272.82. The stock price target lies between a low of $190 per share to a high of $336 per share.
Bottom Line
Alibaba has suffered an impressive decline from its peak. For many investors, this fall was simply too much, too quickly. Accordingly, an easy case can be made that this is a high-quality growth stock trading at a ridiculously cheap valuation.
Then again, this is a high-profile Chinese tech stock in the purview of Chinese regulators who don’t seem to want to let up. Anything goes in terms of the regulatory oversight Chinese regulators have. This is a different animal than what U.S. investors are used to, with distinct risks.
However, there’s a strong likelihood that the reward with Alibaba stock outweighs its risk today.
Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article
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