Stock Analysis & Ideas

Can Alibaba Stock’s (NYSE:BABA) Superb Rally Continue?

Story Highlights

The reopening of the Chinese economy and easing of its government’s regulatory clampdown has triggered BABA stock to rally, and it looks like the stock’s momentum can continue. In addition, popular investor Ryan Cohen has recently grasped a significant stake in BABA shares, adding to its bull case.

Chinese internet and e-commerce giant Alibaba (NYSE:BABA) has seen its stock rally from its multi-year low near $58 seen in October 2022 to $120 currently. BABA’s revival expectations laid down in the article I wrote a month ago came true. The stock is up over 30% since then. This is massive, especially compared to the S&P 500’s (SPX) gains of about 1% and the Hang Seng index’s 12% gain over the same period. While investors may think that they are too late to now buy the stock, that may not be entirely true. I believe that given the resurgence of the Chinese economy, BABA’s strong fundamentals, and its business growth potential, the stock will continue its rally.

Now, let’s look at BABA’s 5-year chart below. Despite the recent revival, BABA is far below its all-time high of ~$319 from October 2020.

Regulatory Crackdown on Chinese Tech is Easing

2023 started on a high note for BABA and the Chinese tech sector following positive news from the Chinese government’s new financial policies that seek improved relations with their U.S. counterparts. Newly- appointed Chinese foreign minister Qin Gang stated that he hopes to see better relations with the U.S. in the future. In addition, Guo Shuqing, Chairman of China’s Banking and Insurance Regulatory Commission, said that the regulatory overhaul is nearing its end.

On top of that, BABA stock got an additional boost. Beijing authorities approved a capital raise of $1.5 billion for BABA’s financial technology company Ant Group.

Investors saw this as yet another reaffirmation of China’s easing regulatory crackdowns. For reference, BABA owns a third of Ant Group.

China Buys More BABA Shares

Ensuring that the Chinese government has a big piece of the BABA pie, last week, the government revealed that it will buy “golden shares” of many companies like BABA and Tencent Holdings (OTC:TCEHY). It also recently bought golden shares in BABA’s media and entertainment subsidiaries: Youku and UC web.

What are golden shares? Golden shares are special shares that allow the holders to have representation on the company’s Board of Directors. In addition, they also get veto rights and enjoy more power than the normal shareholders.

This can mean two things. First, the Chinese government is confident about the growth prospects of these stocks. Second, though the regulatory clampdown has ended, this is the government’s way of still holding significant power over these giant Chinese stocks.

Activist Investor Ryan Cohen Buys Big Stake in BABA; Higher Buybacks Possible

Recently, popular investor Ryan Cohen added a considerable stake in BABA shares though the exact amount is not yet revealed. According to The Wall Street Journal, the stake is said to be worth “hundreds of millions of dollars.”

Further, Cohen is pushing BABA to accelerate its share repurchase program. Cohen believes that BABA has the potential to achieve an impressive 20% growth in its free cash flows over the next five years. Higher buybacks make sense if that turns out to be true.

In November 2022, BABA’s management hiked its existing share repurchase program by $15 billion to $40 billion, effective until March 2025. However, Cohen is encouraging the board to increase the buybacks by another $20 billion to $60 billion. The company made the most of its cheap valuation in 2022, having bought back $18 billion worth of shares as of the end of October 31, 2022.

If BABA gives into Cohen’s suggestions, it could bring a huge return to shareholders by reducing the company’s total share count. Overall, buybacks of $60 billion would make up nearly 19% of the BABA’s current market cap.

The buybacks are further supported by a sturdy balance sheet, with cash and cash equivalents of ~$68.5 billion as of September 30, 2022, as well as robust future free cash flow generation.

In terms of its valuation, Alibaba looks attractive, as it’s trading at a huge 33.5% discount to its five-year historical forward P/E average of 23.2x. BABA’s current forward P/E ratio is hovering around 15.4x.

Is BABA Stock a Buy, According to Analysts?

According to the Wall Street community, Alibaba’s future looks bright. Overall, the stock commands a Strong Buy consensus rating based on 16 unanimous Buys. Alibaba stock’s average price target of $138.53 implies 15.2% upside potential from current levels.

Conclusion: BABA Stock Looks Attractive Despite Its Rally

The investment community has once again become bullish on Chinese stocks like BABA. Consequentially, upward price target revisions by several analysts were seen over the past month.

China’s recovery and massive size will ensure growth for the company. With a robust domestic customer base, strong business growth prospects, especially in the cloud business, and solid fundamentals and cash flows, BABA stock will likely experience great returns in the coming years.

Further, meme-stock king Cohen’s pressure to execute more buybacks clearly indicates his confidence in BABA’s growth story. Therefore, I will buy the stock at current prices.


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