The Chinese economy is definitely losing momentum, as President Trump’s tariffs continue to take a toll on it. Nevertheless, some Chinese stocks have reached bargain levels. Just look at Alibaba (NYSE:BABA), which is one of China’s premier tech operators. Since June, Alibaba stock has tumbled about 30%, making its valuation quite reasonable, especially given BABA’s multiple businesses which are poised to benefit from strong, continuous growth trends.
China Does Have Problems
There’s no doubt that China’s economy is facing meaningful headwinds. The country’s central bank has been pursuing a loose monetary policy, but it is not having much of an impact.
For example, in December China’s manufacturing activity fell from to 49.4 from 50 in November, representing the first drop since 2016. What’s more, Apple’s (NASDAQ:APPL) disappointing guidance was another ominous sign for China’s economy.
China’s economy also suffers from excesses in real estate and construction that are not connected to the trade war with the U.S. But the selling of Chinese stocks may have been overdone. In other words, there are some interesting bargains emerging, including BABA stock.
In this environment, Alibaba stock is one name that investors should consider.
Alibaba’s E-Commerce Business Should Boost BABA Stock
BABA’s e-commerce platforms continue to grow at a solid pace. In the third quarter, the segment’s revenues jumped 56% year-over-year to $10.5 billion. The number of consumers who used the platform during the previous year jumped 25 million versus Q2 to a total of 601 million. Finally, the unit’s mobile MAUs (Monthly Active Users) surged 32 million to 666 million.
One key to BABA’s growth has been its major investments in Taobao, its primarily consumer-driven, e-commerce website. The website’s user interface has been revamped, making it easier for merchants and consumers to use it. Taobao has also increased its use of artificial intelligence and has improved its recommendation feed. Another one of Alibaba’s consumer-driven, e-commerce websites, Tmall, has also been improved.
Long-term, continuous positive catalysts should drive BABA’s e-commerce revenue higher, lifting BABA stock. These catalysts are expected to boost China’s e-commerce spending from $470 billion in 2018 to $839.54 billion by 2021.
Alibaba’s Cloud Business Should Boost BABA Stock
BABA has emulated Amazon’s (NASDAQ:AMZN) expansion into the lucrative cloud- computing market. So far, it’s been a big-time winner for BABA. In Q3, the unit’s top line soared by 90% year-over-year to $825 million.
BABA has the advantage of hosting large numbers of merchants, which has been a critical factor in its development of hosting infrastructure. The company has also been investing heavily in adding new features to its cloud offerings. In fact, it added over 600 new features in Q3, including enhancements related to big data analytics, security, Internet-of-Things, and AI.
The Valuation of BABA Stock
The slowing of the Chinese economy will definitely weigh on BABA’s growth. But it does look like much of that reduced growth has already been baked into BABA stock. Keep in mind that the forward price-earnings multiple of Alibaba stock is 20. By comparison, rival JD.com (NASDAQ:JD) is trading with a price-earnings multiple of about 39. And of course, BABA trades at a steep discount to AMZN’s P/E multiple of 57.
So even if BABA’s top-line drops meaningfully, by 10% or more, its valuation will still be reasonable. Besides, as noted above, BABA should continue to benefit from the strong, continuous megatrends of e-commerce and cloud computing. Meanwhile Wall Street analysts remain bullish on BABA, as their average price target on BABA stock is $202, representing upside of about 40% from the shares’ current levels.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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