This Stock Is a Screaming Buy

Is it possible that long-suffering Alibaba (NYSE:BABA) stock has finally hit a bottom? Just a year ago, BABA stock was trading at more than $300 per share as the Chinese e-commerce powerhouse was flying high. Then came a series of problems and misfortunes that dropped shares all the way down to a multi-year low below $140 earlier this month.

In recent days, shares have run up to around $165, thanks in part to a broader recovery in Chinese tech stocks and the fact that BABA recently became one of the most talked-about stocks on Reddit’s WallStreetBets.

However, shares are still trading at a roughly 50% discount from a year ago. And when you’re talking about a company that is known as the Chinese equivalent of Amazon (NASDAQ:AMZN) with its e-commerce and growing cloud services, that’s worth taking note of.

I’m not going to bury the point here. I love BABA stock and I’ve long believed that it has more potential than Amazon for long-term gains. And now that it’s showing some signs of life after a long bearish slumber, count me in on those who think Alibaba is a screaming buy at this point.

BABA Stock Falls as China Cracks Down

First, let’s take a look at how we got here. So far in 2021, BABA stock is down around 30%. Its fall really started when Beijing took aim at Alibaba’s founder, Jack Ma. In addition to creating Alibaba, Ma was head of Ant Group, one of the world’s biggest fintech companies.

Here’s how Forbes described Ma in a profile:

Ma was also a worldwide celebrity – the most famous living Chinese person. According to polls he was more well-known outside China than Xi Jinping. Jack Ma was Jeff Bezos, Elon Musk and Bill Gates all rolled into one. He was the front-man for the new China.

Obviously, that kind of celebrity and wealth didn’t sit well with the Chinese communist government. In the same profile, an unnamed adviser to China’s State Council says the government wanted to “rein in” Ma, saying it’s like “putting a bridle on a horse.”

If that’s the case, Ma was thoroughly broken. China took calculated steps that cost Ant Group an estimated $70 billion in value.

First, Beijing canceled Ant’s much-anticipated IPO, which would have been valued at more than $34 billion, a new record. As Alibaba had a significant ownership stake in Ant, BABA stock would have gotten an immediate benefit from the offering.

Then the government ordered that Ant form a separate financial holding company that would face the same kind of capital requirements as major banks. And it commanded Ant to break its “information monopoly” on its huge trove of detailed customer data.

Ant’s money market fund, which at the time wasone of the largest in the world, was also hit. Government regulators ordered Ant to “actively reduce” the fund’s size.

In the end, China approved a plan for Ant Group to start operating a new finance company, but Ant Group will own only half of the new company, and it will have to absorb $155 billion in outstanding loans.

Alibaba itself didn’t escape penalties. It was assessed a $2.8 billion antitrust fine. And it was pressured to sell its minority stake in Mango Excellent Media, which is a unit of state-run Hunan TV. Alibaba took a 38% loss on that transaction.

The Bull Case for BABA Stock

With all that happening, why would I still like BABA stock? And why should you?

Obviously, any hopes that Alibaba had in leveraging its e-commerce power, its growing cloud business and Ant Group’s dominant fintech resources are gone. But what remains is pretty darn good.

Alibaba is still the Amazon of China. It is the unquestioned leader in e-commerce in a county where economic growth still dwarfs anything happening in the United States or elsewhere. The World Bank says China should see GDP growth of 8.5% this year. Any politician in Washington would move heaven and earth to get close to that figure.

In its most recent quarter, the company posted year-over-year revenue growth of 33.8%. Net income for the quarter was a whopping $45 billion. So, the company is still making money hand over fist, even if it missed analysts’ earnings estimates.

What’s more, Alibaba Cloud finally turned profitable late last year, and it’s growing fast. Cloud computing revenue is estimated to increase from $5.65 billion in 2020 to $9.3 billion this year, and then $12 billion in 2022, according to Trefis.

The comparisons to Amazon Web Services are inescapable, as is the potential for growth.

The Bottom Line on BABA Stock

I’m not predicting BABA stock will hit $300 again in the next year. But at $165, it is incredibly undervalued. Even the most bearish analysts have set price targets in the low $200s.

Beijing wounded Alibaba, but the damage is not permanent. For short-term traders, BABA stock should rebound nicely over the next six to 12 months. And for long-term investors, consider BABA stock as a bet on e-commerce growth feeding an economy that’s growing faster than anything in the Western hemisphere.

That’s a bet worth taking.

— Patrick Sanders

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Source: Investor Place