It’s often been said that the time to buy is when there’s blood on the streets, and with shares of Alibaba (NYSE: BABA)
falling as much as 40% since last October, it’s not unreasonable to ask if now’s the time to start picking up some shares. While Alibaba’s stock has undoubtedly had a rough first half of the year, there’s some comfort to be had from the fact that many of the big Chinese names have also struggled
Investors of fellow Chinese giants JD.com (NASDAQ: JD)
and Pinduoduo (NASDAQ: PDD)
have had to watch their shares drop more than 40% and 60% respectively, as Chinese government regulators turn up the heat with anti-monopoly regulations. However, Wall Street has had several months to digest the new reality, and while the short-term future mightn’t be quite as bright as it was this time last year, there’s still a ton of opportunity
for long-term investors.
30% Revenue Growth
For starters, these companies, and Alibaba in particular are still growing at a startling rate all things considered. Investors had the opportunity to get a detailed look at the internal engine last night when the company released their Q1 earnings report. Even with all this increased government scrutiny, revenue was up more than 30% on the year and only marginally short of what analysts were expecting. Bottom line EPS on the other hand was ahead of the consensus.
In addition to these reassuring prints, management announced plans to increase their share buyback program by 50%. They struck a bullish tone when they told investors “we are increasing our share repurchase program from US$10 billion to US$15 billion, the largest share repurchase program in the company’s history because we are confident of our long-term growth prospects. Our net cash position remains strong and we have repurchased approximately US$3.7 billion of our ADSs since April 1, 2021. In June 2021, our China retail marketplaces had 939 million mobile MAUs, representing a quarterly net increase of 14 million. We continue to increase penetration in less-developed areas, reflecting our success in broadening product offerings to meet diverse consumer demand.”
The ears of any investor with an investment horizon of more than 5 years should be perking upon hearing this. Alibaba’s $500 billion market cap looks pretty light when compared against the 30% revenue growth that’s just been posted in tandem with management’s aggressive share repurchase plans. It’s also worth noting that Alibaba shares have just bounced off some long-term support which suggests the sellers might be running out of steam and that the momentum could shortly start swinging to the upside.
At the worst point of the pandemic fuelled selloff in March of last year, Alibaba shares touched $170 before leaving that behind as they started their journey to multiple new highs. Last week they momentarily broke below $180 before quickly reasserting themselves and it will be interesting to see how they behave now that the band-aid of uncertainty around their latest earnings has been ripped off.
There are still more headwinds than tailwinds in play right now, but they won’t last forever and if anything these are helping to create what’s potentially a fantastic entry point for long-term buy and hold investors. The current downtrend has also pulled down Alibaba’s price-to-earnings ratio which is now at an appetizing 23. This is well below the mid-50s where it spent much of 2017, 2018, and 2019 and further boosts the risk/reward set up currently in play.
Investors getting involved can expect support around the $170-$180 levels, and if shares can move above their recent high of $230 it would be fair to say they’re on their way to forming a fresh uptrend. Any relaxation in government scrutiny or geopolitical tension would also go a long way to easing the downward pressure, but rest assured; this is a fast-growing e-commerce company that’s on track to service more than a billion unique customers annually in the coming years. It’s already trading at a significant discount and any further weakness should be viewed as a buying opportunity.
Before you consider Alibaba Group, you'll want to hear this.
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