Alibaba Is an Attractive Value Play

Despite its muted forecast for full-year earnings, I am bullish on Chinese e-commerce giant Alibaba (BABA). Warren Buffett famously said, “Be fearful when others are greedy and be greedy when others are fearful.” The adage is true for several stocks out there. But Alibaba is perhaps the greatest example in the market right now.

The e-commerce giant is not having the best time as of late. Regulators in Beijing are sharpening their knives, and many large conglomerates are feeling the pinch. Alibaba is no different. Chinese regulators fined the company $2.8 billion for abusing its market dominance. It is important to note that the fine amounts to about 4% of its 2019 domestic revenue.

The slowdown of the Chinese economy is also weighing down sentiment. The company forecast that its annual revenue growth will slow down to a crawl this year, the worst since its listing in 2014.

Hence, BABA stock is taking a pasting these days. However, the fact that shares are trading at rock bottom prices right now means that there is the potential for opportunity. Alibaba is still head and shoulders above the other e-commerce companies active in its region.

Often referred to as the “Amazon of China,” operating metrics are generally rock solid. For those looking for a solid tech stock during the holiday season, look no further than BABA.

China’s Growth Forecast Is Impacting Alibaba Stock

China’s slowing economy has impacted consumption. There are multiple reasons why this is happening. First, China is employing a zero-COVID strategy. Although many countries in Asia have decided to live with the virus, China persists in this rigorous approach. The preparedness process includes strict lockdowns, even after just one or handfuls of cases have been detected. Naturally, it leads to a slowdown in the economy.

Additionally, the energy crisis in China is just one example of how the world’s supply can be disrupted by high costs for coal and inflexible electricity prices. Due to the energy shortages, local governments enforce rolling blackouts, which primarily affect industries like steelmaking or manufacturing chemicals.

Finally, Evergrande, one of China’s largest property developers, and its debt burden is still big news. Beijing is trying to deleverage the sector and pacify fears. However, panic has spread to other Chinese companies as they also halt or delay payments.

These factors are combined to create a tailspin for the Chinese economy. It grew at just 4.9% in Q3, a steep drop sequentially from the 7.9% expansion in the second quarter. Hence, Chinese companies are feeling the pinch due to a strained economic forecast, and Alibaba stock is no exception.

Quarterly Results Underscore Larger Issues

Over the years, Alibaba has cultivated a reputation as a solid performer. However, its recent quarterly earnings represent a rare misstep. In the BABA earnings release, the e-commerce juggernaut posted Q2 revenue of 200.69 billion yuan ($31.4 billion), representing year-over-year growth of 29%. EPS came in at 11.20 yuan, a 38% dip from the year-ago period. Both revenue and EPS figures missed estimates.

Customer Management Revenue, or CMR, is the company’s bread and butter. That segment, in particular, is struggling. Revenues from this area rose just 3% from the year-ago period.

A bright spot, though, is Cloud Computing. Investors are closely monitoring this area. The segment has been on a tear, jumping 33% to make up 20 billion yuan in revenue. This year’s EBITA was 396 million yuan versus a 567 million yuan loss last year, proving that the company is turning things around. Moving forward, the growth of this segment will become a lynchpin of the company’s overall strategy.

As highlighted in the earlier section, the Chinese economic slowdown affects BABA. However, the other major issue is Chinese regulatory concern. The Chinese government is clamping down on the domestic technology industry. Antitrust and data protection are taking center stage.

For years, Chinese tech giants grew unabated. However, Beijing now wants to regulate the behavior of the domestic technology industry. The fine of $2.8 billion in April becomes understandable in this context.

Looking ahead, BABA cut its revenue guidance for Fiscal Year 2022. Previously, the company had forecast 930 billion yuan, a year-over-year jump of 29.5%. However, now it expects much more conservative revenue growth within the range of 20% to 23%.

Management Shuffle

In light of slowing performance, Alibaba is looking to shake things up. Hence, longtime finance chief Maggie Wu is stepping down from her position. Deputy CFO Toby Xu will be the main CFO starting in April 2022.

In a press release, Wu cited her retirement as the “culmination of extensive preparation over many years” and said it would allow new blood injection into the management circle.

Alibaba is creating two new divisions — International Digital Commerce and China Digital Commerce. The change is aimed to reverse slowing growth and create a clearer path to growth and value creation. The international business division will manage the company’s operations in Europe, South America, and Southeast Asia, among other places.

Alibaba has tapped 36-year old executive Jiang Fan to lead its overseas division. Meanwhile, Trudy Dai will take care of the domestic e-commerce business operations. Jiang led Taobao’s push into mobile and was seen as a contender to take the reins of Alibaba Group until he became embroiled in a personal scandal last year.

AMZN Forecast Versus Alibaba

The two biggest companies in e-commerce are Amazon (AMZN) and Alibaba. The fight for global leadership has been a long one. The two companies have been going head-to-head as they both strive to become the world’s leading online retailers.

Amazon launched in 1995, whereas Alibaba started up less than five years later. The former has taken over American retail, while Alibaba rules China’s e-commerce market.

However, the business models of Amazon and Alibaba couldn’t be more different, with the former being an e-commerce company while the latter is operating as either a retail site or auction house.

You cannot go wrong investing in either one. But at the moment, Alibaba is the better stock. The AMZN forecast doesn’t call for much upside. In comparison, due to the issues BABA faces domestically, this one is trading at a huge discount.

Wall Street’s Take

The sentiment for Alibaba on Wall Street is turning bullish. The stock has a Strong Buy consensus rating, based on 20 Buys and three Holds assigned in the past three months. The average Alibaba stock forecast of $203.05 implies 76.9% upside potential.

Alibaba Stock Forecast Implies Huge Upside Potential

Understandably, BABA has seen better times. Alibaba is still investing heavily in new business lines as its core e-commerce business peaks and profitability slows.

If things stabilize next year, then BABA stockholders will be laughing all the way to the bank. According to Goldman Sachs, the Alibaba Group is the largest e-commerce player in China, with an estimated 69% market share for 2020.

Considering its history and size, Alibaba is a value play at the moment. Much of what is happening with the company has nothing to do with its operations. Instead, you can chalk most of that up to the intense regulatory environment in China. Nevertheless, the Alibaba stock forecast is solid. The fact that shares are available at a discount is more than enough reason to consider it.

Disclosure: At the time of publication, Faizan Farooque did not have a position in any securities mentioned in this article.