BABA with Nobias technology: Up 35% Alibaba is still a Stock with Significant Upside
After months of selling pressure, largely due to regulatory issues, the Chinese tech sector saw a major rebound this week. The KraneShares CSI China Internet ETF (KWEB) has now rallied 43.19% during the last 5 trading sessions alone. It’s important to note that even after this massive rally, the KWEB is still down 14.66% on a year-to-date basis. During the trailing twelve months, the KWEB index is down 63%. Evelyn Chang published an article at CNBC this week highlighting the inspiration for last week’s rally.
After months of selling pressure, largely due to regulatory issues, the Chinese tech sector saw a major rebound this week. The KraneShares CSI China Internet ETF (KWEB) has now rallied 43.19% during the last 5 trading sessions alone. It’s important to note that even after this massive rally, the KWEB is still down 14.66% on a year-to-date basis. During the trailing twelve months, the KWEB index is down 63%. Evelyn Chang published an article at CNBC this week highlighting the inspiration for last week’s rally.
Chang noted that China “signaled support” for its equity space this week, saying, “Chinese and U.S. regulators are progressing toward a cooperation plan on U.S.-listed Chinese stocks, state media said, citing a financial stability meeting Wednesday chaired by Vice Premier Liu He.” She continued, “Liu also heads the central government’s finance committee and is a member of the Chinese Communist Party’s central committee politburo — the country’s second-highest circle of power.”
CNBC translated the report published by Chinese state media, which read, “The Chinese government continues to support various kinds of businesses’ overseas listings.” Furthermore, Change said, “The article said regulators should “complete as soon as possible” the crackdown on internet platform companies.”
On Friday, the rally in the Chinese equity space continued. A report from Bloomberg News noted that the latest leg of the rally was based upon speculation that Chinese regulators may ease monetary and COVID-19 policies as well.
BABA March 2022
The Bloomberg article said, “Expectations that the People’s Bank of China would take more steps in the near term to spur the economy led to the recovery in the afternoon session, according to traders.” It continued, “One tool could include cutting banks’ reserve requirements, they said.”
Lastly, the article notes, “Investors are also turning more hopeful that China will make adjustments to its Covid restrictions. Xi has pledged to reduce the economic impact of his Covid-fighting measures, signaling a shift in a longstanding strategy that has minimized fatalities but weighed heavily on the world’s second-largest economy.”
With the potential threat of delisting from U.S equity exchanges and some of the uncertainty associated with regulatory pressures lifted from the space, investors flocked back into many popular Chinese stocks. Alibaba (BABA) shares rose 35.48% last week, pushing its market cap up to $269.7 billion.
Prior to BABA’s recent rally, Nobias 5-star rated author, Micah Haroldson, published an article on Alibaba in which he highlighted the company’s fundamentals. Haroldson said, “Alibaba Group stock opened at $86.71 on Friday. The company has a market cap of $235.06 billion, a price-to-earnings ratio of 23.25, a PEG ratio of 1.71 and a beta of 0.88. The firm’s fifty day moving average is $118.08 and its 200 day moving average is $138.82. The company has a quick ratio of 1.64, a current ratio of 1.64 and a debt-to-equity ratio of 0.12. Alibaba Group Holding Limited has a 52-week low of $86.68 and a 52-week high of $245.69.”
If the regulatory headwinds are removed from the Alibaba narrative, the stock can get back to trading on fundamentals. Coming into BABA’s recent earnings report, Nobias 5-star rated author, The Asian Investor, published an article on Alibaba at Seeking Alpha showing their bullish outlook on the company’s growth potential.
The Asian Investor said, “For the December quarter, the expectation is for Alibaba to have earnings of $2.55 per share (implying a 25.3% year over year decrease) and revenues of $38.8B. For the full-year, Alibaba is expected to generate 20-23% revenue growth, as per company guidance, which would result in total FY 2022 revenues of $135.9B. I believe Alibaba may even be able to outperform its own guidance based on accelerating e-commerce momentum.”
With regard to the recent news surrounding a softer regulatory stance by the CCP, the Asian Investor showed great foresight in their February 4th article, saying,“I believe the risk analysis has changed quite a bit in recent months and political risks have decreased. Regulators now appear to take a softer stance on overseas stock listings which implies improving commercial growth prospects for Alibaba's core business. Macro risks are still present and Alibaba is subjected to political risks, but I believe an ADR delisting is now highly unlikely.”
Ultimately, looking ahead to BABA’s fiscal Q3 results, The Asian Investor concluded, “As Beijing pulls back from cracking down on its leading technology and e-commerce companies, there is an opportunity for a major re-pricing of Alibaba's free cash flow growth prospects.”
Dante Gardner, a Nobias 5-star rated author, broke down BABA’s fiscal Q3 results in a report published at The Lincolnian Online, saying: “The specialty retailer reported $16.87 EPS for the quarter, topping the consensus estimate of $1.92 by $14.95. The business had revenue of $242.58 billion for the quarter, compared to the consensus estimate of $245.79 billion. Alibaba Group had a return on equity of 10.84% and a net margin of 7.86%. Alibaba Group’s revenue was up 9.7% compared to the same quarter last year. During the same period in the previous year, the business earned $2.98 EPS. Sell-side analysts forecast that Alibaba Group Holding Limited will post 6.06 EPS for the current year.”
Growth At A Good Price, a Nobias 5-star rated author, touched upon these earnings results in a recent Seeking Alpha article as well, noting that while BABA’s earnings growth was negative on a year-over-year basis, much of the bearish pressure on the stock was related to one-time items.
Growth At A Good Price said, “First of all, the GAAP earnings and operating income were impacted by unrealized stock market losses and impairment charges. Those together took a $5 billion bite out of earnings.” They concluded their article saying, “The bottom line on Alibaba's Q3 earnings is that they highlighted what we always knew about the company. Namely, that it is a fundamentally strong entity with solid profitability and revenue growth, that has the ability to grow more from this point onward. Yes, higher taxes and increased competitive pressure will eat into the growth somewhat. But none of these factors are fatal to Alibaba's core business, which will start to thrive as it laps the weak 2021 quarters later this year.”
Billy Duberstein, a Nobias 4-star rated author, published an article in late 2021 at Motley Fool showing that while Alibaba appeared to be cheap, there is still a strong speculative growth element associated with this company. Duberstein said, “However, outside of Alibaba's core business, basically no other new Alibaba business -- whether acquired or organically built -- is currently profitable. Many investors have faith that these growing new commerce businesses in grocery, delivery logistics, digital entertainment, and other areas will eventually be profit contributors. Although I do think Alibaba's cloud will eventually become nicely profitable, all the other businesses are in very competitive fields and are no sure thing.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
More recently, in a separate Motley Fool article, Duberstein acknowledged all of the risks associated with BABA shares, saying, “Remember when buying Chinese stocks, wherever they're listed, that the Chinese government can giveth, but can also taketh away.”
However, he concluded, “So for those who understand the risks, Chinese stocks in general may look like good values heading into 2022 after underperforming last year. Alibaba is certainly a candidate to outperform, but really the whole Chinese tech sector is much cheaper than it used to be. If you have a favorite -- whether it's Alibaba or another name -- now may be the time to go shopping.”
Overall, when looking at the credible authors that the Nobias algorithm tracks (only those with 4 and 5-star ratings), we see a strong bullish lean when it comes to Alibaba shares. 81% of reports published by credible authors covering BABA have expressed “Bullish” sentiment. And, even after the stock’s 35% rally this week, the credible Wall Street analysts that the Nobias algorithm tracks also continue to be bullish on BABA shares.
Right now, the average price target being applied to BABA by the credible analysts that we track is $181.67. Compared to BABA’s current share price of $117.24, that average price target represents upside potential of over 60%.
Disclosure: Nicholas Ward has no BABA position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.