Chinese e-commerce giant Alibaba (BABA) - Get Alibaba Group Holding Ltd. Report, has significantly underperformed its 2019 and 2020 showings this year. The stock currently sits more than 60% below its historic peak, reached in late October 2020.
Since then, a number of concerns have been haunting Alibaba investors, many of them related to Beijing's regulatory clampdowns and the risk of NYSE delisting. Share prices have dropped significantly not just for BABA but also for several Chinese stocks listed on American stock exchanges, such as Nio (NIO) - Get NIO Inc. (China) Report, JD.com (JD) - Get JD.com Inc. Report, and Baidu (BIDU) - Get Baidu Inc. Report.
Plus, Alibaba recently reported fiscal results that fell below estimates, with both earnings and revenues coming up short for Q2. The company also provided lower than expected guidance for the next fiscal earnings, which will take place at the end of January.
However, in spite of this series of bearish events and a sharp decline off of its historical peak, Wall Street believes Alibaba stock is cheap and predicts strong upside ahead.
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Alibaba stock is a strong buy
The consensus around BABA stock is currently a “strong buy” - that’s based on 22 analysts over the past 3 months who have offered ratings for Alibaba looking forward over the next 12 months.
Alibaba stock’s average price target is $203, which suggests a 67% upside, as of last check. The most bullish suggested price target is $252, which implies an upside of over 100%. The most bearish target is $140, which still suggests an upside of 15%.
- One of the most bullish analysts is CSLA’s Elinor Leung, who sees BABA as being very cheap at current levels. She is predicting more than 100% upside with a price target of $250. Even though Alibaba disappointed investors with its last earnings results, Leung still believes that the company's strategic investments will continue to pay dividends and says that the stock's weak performance does not reflect its solid fundamentals.
- Daiwa analyst John Choi remains cautious about increasing competition in e-commerce, which he believes is a strong risk for Alibaba, especially in China. Nevertheless, just two weeks ago, he maintained his buy recommendation on BABA with a price target of $170 – suggesting a 39% upside.
- Bullish on the long-term outlook for Chinese market development, Goldman Sachs analyst Piyush Mubay sees Alibaba shares growing 76% over the next 12 months. She suggests the stock is a buy and has set a $215 price target.
- One of the few BABA skeptics is Atlantic Equities’ James Cordwell, who recently downgraded his rating on Alibaba from “buy” to “hold.” Cordwell believes that the recent "Investor Day" event hosted by Alibaba management did not inspire confidence and may even help turn competitors Taobao and Tmall around. Also, the company's aggressive investment plan left him pessimistic about Alibaba's capital allocation discipline. However, it should be of note that Wall Street’s most pessimistic analyst has still set his price target at $140, implying a 15% upside over the next 12 months.
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From a fundamentals standpoint, Alibaba’s business continues to be robust, although it is having trouble keeping apace with previous years’ growth. That’s largely due to lessening e-commerce tailwinds, which had been driven by stay-at-home trends.
Still, the company has growing segments in cloud computing and storage, digital media, and entertainment. Even though these segments remain much smaller than e-commerce, for now, they have been consistently adding to BABA’s total revenues. See below:
Also, Chinese regulatory risk brought extra pressure to Alibaba’s stock over the past year. The mysterious disappearance of Alibaba founder Jack Ma, macro geopolitical risks, and NYSE delisting risk, have all been causes for concern by major investors in BABA.
It is important to note that an eventual delisting of large Chinese companies from the NYSE could bring drastic consequences for the Chinese economy. China could become viewed as a non-investable country - something that’s probably not in its best interest.
But Alibaba’s valuation remains quite attractive, especially when compared to its main peers. BABA currently trades at a P/E ratio of 17x times, much lower than Amazon (AMZN) - Get Amazon.com, Inc. Report, which trades at a P/E of 64x times, and even lower than JD.com, which trades at a P/E of 24x times.
BABA’s impressive multiples are one of the main reasons that Wall Street sees the company as undervalued.
(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)