Too Cheap to Ignore, Despite Risks By TipRanks
The past few months have been very tough for Chinese equities, with the Chinese government’s crackdown on Big Data rattling international investors. In terms of direct damage to shareholder value, the most alarming event was China’s banning of for-profit tutoring. This led to New Oriental Education (EDU), and TAL Education group (NYSE:) shares plummeting more than 90% from their previous highs.
The Chinese government’s wipeout begun with relatively small fines, such as those inflicted on Alibaba (NYSE:). Investors are dumping Chinese stocks in masse, as the Chinese government continues to destroy an entire business model.
Not only is the ongoing crackdown showing no signs of a slowdown, but a scenario in which the Chinese government continues to move in towards a “total control” policy, as recently discussed by Dan David, Founder & CIO at Wolfpack Research, seems more likely by the day.
The pressure such policies may place on certain industries is not enough to stop China’s tech giants like Alibaba. They are well-diversified. It plays an important role in China’s economy, which means that the government has less incentive to interfere with their activities.
A more important fact is that Alibaba has a lot of money as shown in its latest results. These are the reasons I believe that this stock is a good investment. (See Alibaba stock charts on TipRanks)
A Money-Making Machine
As much as investors would like to focus on the risks attached, it is simultaneously hard to ignore Alibaba’s snowballing financials. Alibaba’s Q2 2022 results showed that it is resilient in a turbulent market.
Alibaba’s global Ecosystem reached approximately 1.18 billion active users annually, and revenues grew by 34% to $31.8 million. The previous quarter saw 45 million net user increases.
The EPS per ADS was $2.57. This is 12% more than the previous year. It’s due to Alibaba’s astonishing net margins of 21.6%. It is impressive because Alibaba also reinvests significant amounts back into its business in order to stimulate growth.
Alibaba’s net margins would easily exceed 30% if the company reduced its investments. Such margins are something that even some of the largest American tech firms would envy.
The Stock is Undoubtedly Cheap
Based on Alibaba’s FY2022 estimated EPS of $9.73, the stock is trading at a forward P/E of ~15.6. Analysts expect a moderate EPS growth rate of 20% for the next year, which even suggests a slowerdown in revenues. Shares will trade at a forward PE of 13.6 if they don’t rebound.
Simply stated, Alibaba’s profitability and growth are greatly affected by the stock’s performance. If this is not already the case, it will eventually become so severe that stock prices will follow suit. Alibaba’s management has also been able to demonstrate this by increasing their stock purchase program to $15 Billion.
Wall Street’s Take
Turning to Wall Street, Alibaba has a Strong Buy consensus rating, based on the 23 Buys, one Hold, and one Sell assigned in the past three months. At $265.09, the average BABA price target implies 76.5% upside.
Disclosure: As of the publication date, Nikolaos Sismanis owned stock in a position that was long and beneficial to Alibaba’s shares.
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