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Alibaba Stock: Fasten Your Seatbelts, It's Rally Time

Alibaba shares are up over 20% after recently dipping below $110 per share. A strong early 2022 performance may indicate that Wall Street is right about BABA.

Shares of Chinese e-commerce giant Alibaba  (BABA) - Get Alibaba Group Holding Ltd. Report are experiencing a moment of bullishness not seen in a long time. Hounded by a long series of regulatory issues and pressure from the Chinese government, BABA has fallen as much as 60% from its historic peak in mid-October 2020. BABA’s decline throughout 2021 was also driven by the company’s growth coming in below market expectations.

Yet recently, amidst rumors of Chinese companies being delisted from the NYSE and in the face of some price target cuts from Wall Street, BABA’s stock has shown strength.

Helping spur the rally, famed investor Charlie Munger recently bought BABA’s dip (again) - the market reaction was favorable.

Here are some reasons why BABA might have a long rally ahead of it.

Figure 1: Alibaba Group corporate offices.

Figure 1: Alibaba Group corporate offices.

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Value investing seal of approval

The investment strategy known as “value investing”, invented by Benjamin Graham, involves buying stocks that have the potential to generate long-term value and that are apparently trading below their intrinsic value.

One of the most well-known followers of value investing is Charlie Munger, Vice Chairman of Berkshire Hathaway, the conglomerate controlled by the legendary Warren Buffet. Munger recently doubled his Alibaba position within the portfolio of his own company, the Daily Journal Corporation  (DJCO) - Get Daily Journal Corporation Report.

Figure 2: Charlie Munger, Vice Chairman of Berkshire Hathaway and Chairman of the Daily Journal Corporation.

Figure 2: Charlie Munger, Vice Chairman of Berkshire Hathaway and Chairman of the Daily Journal Corporation.

Munger has been taking advantage of Alibaba’s dips, using them as opportunities to load up on more shares. According to reports from DJCO, Munger bought 300,000 BABA ADRs during last year’s fourth quarter, plus 302,060 in the third quarter - that’s a total of 602,060 Alibaba ADRs during 2021.

The idea that Alibaba may fit well into a value investing model pleased the market and added fuel to the rally. Many investors closely watch the moves of famous investors, and Charlie Munger, at 98 years of age, has experience aplenty and boasts a very impressive track record.

Despite price cuts, Wall Street remains bullish

The consensus on Wall Street is that Alibaba stock is a “strong buy” at current levels. Notably, several investment firms have recently lowered their price targets on Alibaba; they’ve cited various concerns, including slowing growth in online Chinese consumption. Still, the median price target is $196.98, indicating an upside of 43% from the current price of $137.

Big banks such as Barclays, for example, which offers a $247 price target on BABA, see the e-commerce behemoth as a top pick in the Chinese tech sector. Some analysts also believe investors are underappreciating both Alibaba's cloud potential and its share in Ant Group, a Chinese tech giant.

Also bullish on the long-term outlook for Chinese market development, Goldman Sachs has a price target of $215 for BABA, and sees more than 50% upside ahead. Citigroup offers a very similar price target of $216.

The bottom line

Alibaba faces a challenging macroeconomic background, significant regulatory pressures, and an expected slowdown of consumption in China for 2022. Nevertheless, it is undeniable that, when compared to its competitors, Alibaba’s valuation seems to be quite attractive.

BABA currently trades at a P/E ratio of 17x, much lower than Amazon  (AMZN) - Get, Inc. Report, which trades at a P/E of 64x, and even lower than fellow Chinese company  (JD) - Get Inc. Report, which trades at a P/E of 24x.

Alibaba's fundamentals have changed little since its share price peaked in 2020, and the significant devaluation of its stock during 2021 may have been largely unjustified. Meanwhile, 2022 has started well for BABA, and the stock has been blessed by “smart money” - we think that portends good things for Alibaba's future.

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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 the Wall Street Memes)