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Should You Bet on Alibaba's Pullback?

·3 min read

- By Nicholas Kitonyi

Shares of Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE:BABA) have fallen more than 25% over the last two months. The stock is now up just over 8% this year, which leaves a lot of room for improvement going into 2021.

Should You Bet on Alibaba's Pullback?
Should You Bet on Alibaba's Pullback?

Alibaba has been in the spotlight over the last several weeks amid an anti-monopoly investigation in China. The Chinese government had previously blocked the company's subsidiary, Ant Group Financial, from issuing an initial public offering. Alibaba has now lost more than $250 billion worth of market value since late October, when it hit a historical high of $309 per share.

Nonetheless, analysts have pointed out in recent reports that the regulatory risk the company is exposed to may be overblown. This has resulted in a slight rebound of 6% over the last two days. One of the key features of Alibababa that is being pointed out is its profitability, which analysts believe will be enough to keep it in the good graces of the Chinese government.

Earlier reports had suggested the regulatory challenges the company currently faces could ultimately slow its growth in the short term. The Chinese government told Ant Group to focus on the payments business and prevented it from expanding to loan originations. This is part of the reason why the IPO was blocked on both the Shanghai and Hong Kong stock exchanges.

However, with the stock showing signs of a rebound, this suggests investors may have realized the regulatory risk is not as big as initially feared. Therefore, this could be an opportunity to buy shares of one of the biggest technology stocks in the world.

From a valuation perspective, shares of Alibaba trade at a relatively attractive price-earnings ratio of 31.96, which compares to the price-earnings ratio of Tencent Holdings Ltd.'s (HKSE:00700) equivalent of 37.58. Alibaba's price-earnings ratio is also relatively better than that of its global e-commerce rival Amazon.com Inc. (NASDAQ:AMZN), which is at 96.42.

When we factor in expected growth for the next five years, Alibaba's PEG ratio of 0.76 again suggests the stock is relatively undervalued compared to Amazon's equivalent of 1.23.

One of the reasons Alibaba is being investigated for anti-monopoly practices is because of the market share it commands in China. Yet, China's e-commerce market has more room for growth than the U.S. market. The company is also targeting global markets, which include Europe and India, the same markets that Amazon wants to add to its portfolio to stimulate long-term growth.

In summary, shares of Alibaba have pulled back significantly over the last two months. This may have created an opportunity for value investors to pounce before the next rally. There is also an exciting opportunity for long-term growth investors.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.