The Chinese property development space became the center of attention worldwide since China Evergrande’s debt crisis spiraled out of control. Not only the company, the industry, and the Asian country, but the entire global market has felt the impact.
As the predicament unfolds, Wall Street Memes takes a closer look at one of the most popular Chinese stocks. Giant e-commerce company Alibaba (BABA) - Get Alibaba Group Holding Ltd. Sponsored ADR Report saw its shares decline to $150 for the first time since mid-2019. Should investors take advantage of weakness and buy the dip?
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The China factor
Recently, the Chinese government introduced a range of regulations that are partly aimed at the technology sector. In the case of Alibaba, the company was charged with a $2.8 billion fine on an anti-monopoly probe. Such moves concerned investors and made them pull billions of dollars away from large Chinese companies.
Geopolitical uncertainty has now been reinforced in the Chinese real estate sector. Heavily indebted, China Evergrande has been compared to former US-based bank Lehman Brothers, arguably the trigger of the 2008 financial crisis.
Goldman Sachs now fears that China Evergrande’s woes could spread to other corners of the global economies. Meanwhile, Société Générale’s economists attribute a 30% probability of a “hard landing”, which would be bad news for Chinese stocks at least (if not for the market at large).
Wall Street on BABA
Despite all the concerns coming from China, Wall Street still believes that Alibaba stock is heavily undervalued. There currently is a whopping 75% consensus share price upside on BABA, based on average price target of $265 suggested by 25 sell-side reports issued in the past three months.
One of the most bullish is Susquehanna. The bank still sees more than 100% upside potential, despite regulatory concerns. Even after reducing his price target to $310 from $350, analyst Shyam Patil sees secular growth opportunities as the Chinese e-commerce leader benefits from having invested heavily in the business.
The lone bear is Erste Group analyst Stephan Lingnau. He recently downgraded BABA to sell from neutral. The analyst believes that political risks are too significant for BABA's investors to ignore. Also, he mentioned that the Chinese government has been enacting legislation that has a "strong impact" on corporate governance, and the restrictions can be meaningful.
Wall Street Memes’ Take
Ever since China’s regulatory storm led to the disappearance (quite literally) of Alibaba’s co-founder and former CEO Jack Ma, BABA has been suffering from investor exodus. Now, amid the Evergrande crisis, sentiment has only gotten worse.
However, from the perspective of the company’s fundamentals, Alibaba seems to be in better footing than the current 51% drawdown in share price suggests. Wall Street analysts seem to acknowledge compelling gains potential.
Alibaba, now worth around $430 billion, commands a price-to-earnings ratio of 15 times on projected earnings CAGR (annualized growth rate) of 16% through the next five years. Indeed, the stock appears to be very inexpensive vis-à-vis the company’s growth prospects. It is not hard to understand why so many Wall Street analysts remain bullish on this name.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)