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When Stacked Up Against Amazon, Alibaba Comes Out On Top

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·5 min read
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In recent weeks, investors have begun to shift their focus from U.S. stocks to Chinese stocks. This shift comes amid some intriguing recent developments, which may have created a unique buying opportunity for long-term investors.

Among the Chinese stocks that many believe have the most upside potential in the current environment is Alibaba (BABA). It is often referred to as the Amazon of China, yet it trades at a significant valuation discount to the American juggernaut. This is a head-scratcher to many.

After all, China is a hyper-growth market supported by some pretty impressive demographic shifts. The country’s middle class is ballooning in size, and the country’s economy is on pace to eventually eclipse that of the U.S. Owning shares of the Amazon of China, before it grows to Amazon’s (AMZN) size, seems like a good deal.

The opportunity to pick up Alibaba shares at roughly half Amazon’s valuation, with superior growth prospects, could be an opportunity that may not be around for much longer.

Here’s what has driven this disparity in valuation, and why Alibaba could rapidly close this gap.

Bearish Sentiment On China Driving Valuation Discrepancy

By equating the relative valuations of Chinese stocks to their comparable American peers, it’s clear that these stocks seem to be out of favor with the average investor.

There are three key factors that have likely led to this situation, each of which is tied to what many view as an unfavorable political landscape for Chinese stocks.

First, the Biden Administration hasn’t minced words regarding China. Biden has been, in many ways, harsher on China than Trump (at least from a rhetorical standpoint) of late. Various acrimonious talks between the countries have led to the feeling that U.S.-China relations aren’t going to improve anytime soon.

More recently, bipartisan support in the U.S. has been building to back a law pressing Beijing on human rights issues. China doesn’t like to be pushed around, and President Xi has suggested that the U.S. should “stop bossing others around.” Chinese stocks might not have performed as well as their American counterparts as U.S. investors prefer to steer clear of this rhetorical war of words.

Secondly, it appears the Biden Administration is willing to ramp up its legislative efforts to install roadblocks for Chinese stocks. A Trump-era bill, the “Holding Foreign Companies Accountable Act,” was adopted into law under Biden’s watch. This bill requires the SEC to identify companies that will require auditing by a U.S. watchdog. Companies that don’t comply with these new rules could be delisted from U.S. exchanges. Again, the broadly negative sentiment over delisting concerns has hurt Alibaba’s valuation in recent months.

And finally, there's the whole Jack Ma/Ant IPO fiasco. Alibaba’s founder, and one of the most influential Chinese businessmen in recent history, has come under scrutiny for various public comments made against the Communist Party. These comments essentially resulted in the cancellation of what would have been the world’s largest IPO (at $35 billion), the forfeiture of a large portion of Ma’s Ant stake to the Chinese government, and public exile for Mr. Ma from the limelight he once enjoyed.

These factors are certainly bearish and have been more than priced into the company’s share price. However, here’s why the tide could be about to turn for Alibaba, soon.

Alibaba’s Valuation Is Being Recognized By Some Pretty Big Names

At some level, every company becomes too cheap to ignore. Indeed, it appears such is the case with Alibaba right now.

Currently, Alibaba is valued at a trailing 12-month price/earnings multiple of 25.34, with a forward revenue growth rate of 37.6%.

Amazon’s comparable metrics happen to be much less attractive. The company’s price/earnings multiple of 62.22, and forward revenue growth rate of 27% make this stock appear overvalued on a relative basis.

Additionally, from a profitability standpoint, Alibaba takes the cake in terms of margins right now.

So, investors are picking up a faster-growing company that’s expanding more profitably, in a country that’s seeing economic development outpace the U.S., with a tremendously long runway for such growth to materialize.

The bigger a company gets, the harder outsized expansion becomes to achieve. BABA’s market cap is roughly one-third of the size of AMZN’s.

Charlie Munger’s recent comments on Alibaba are highly bullish for long-term investors. Mr. Munger recently made a massive purchase of BABA stock (approximately $37.5 million worth), making this the third-largest holding in his portfolio. He believes BABA stock is preferable to U.S. treasury bills, something investors need to consider when thinking about the aforementioned risks associated with this stock. (See Alibaba stock analysis on TipRanks)

Wall Street’s Take

According to TipRanks, the consensus rating is a Strong Buy, based on 21 analyst ratings. Of these, 20 recommend a Buy, while 1 suggests a Hold.

The average analyst price target of $311.17 implies approximately 37% upside potential from current levels over the next 12 months.

Conclusion

Alibaba is perhaps a once-in-a-lifetime buying opportunity at existing levels. There’s reason to believe that the concerns around Chinese stocks are currently overblown and are likely to be short-lived.

On a forward-looking basis, it might be reasonable to expect BABA stock to trade well in excess of $500 per share if growth materializes as expected and the market shifts its overly negative sentiment on this stock. Indeed, Alibaba certainly appears to be well-positioned towards a possible double-up for growth investors over the medium-term.

Additionally, Charlie Munger’s long-term investing track record speaks for itself. For long-term investors, BABA stock offers potentially one of the most compelling opportunities on the market today.

Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.