Everyone in the world is wrestling with the trillion-dollar question: When will the U.S. economy open? It’s a question that is puzzling academics and medical professionals alike, and no one seems to have a definitive answer.
According to Dr. Anthony Fauci, America’s top infectious disease expert, parts of the country that have adequate testing facilities in place, could see a “rolling reentry” as early as next month.
If that is true, then we have a rough idea of when the country, and equally importantly the economy, will get back on track. Unfortunately, it also means investors are running out of time to take advantage of the market dip we find ourselves in at the moment (the S&P 500 is down 12% year-to-date as of this writing).
That’s not to say that all stocks will experience an immediate bounce-back once the crisis is over. Still, its generally assumed the stock market would see substantial gains, which could erode losses seen since the crisis reared its ugly head at the start of the year.
However, certain companies will never be the same, and that’s why, more than ever, it’s essential to make sure you have only the best all-weather stocks in your portfolio that will survive and thrive in all situations.
One such stock is Alibaba (NYSE:BABA), China’s answer to Amazon (NASDAQ:AMZN), and just the second Asian company to break the U.S. $500 billion valuation mark. However, before proceeding further, we would like to say that the stark difference between the recent fortunes of Amazon and Alibaba has been incredible, despite the companies having similar business lines. Amazon has rallied quite well during the recent crisis, while the same cannot be said for the Alibaba stock, which has struggled.
However, it’s only a matter of time before the Alibaba starts gathering steam, considering the company’s solid financials and key business supply lines, which are set to see a lot more momentum due to the effects of the virus. Also, Alibaba’s diversified business has held up well despite its supply chain hiccups caused by the Covid-19 epidemic, but it’s not wholly all out of the woods yet.
Revenues are expected to take at least a 30% hit in the first quarter. Despite the dip, analysts expect the company to post double-digit gains in the next quarter and round-off the year with 30% growth by the end of the year.
Nevertheless, BABA is offering an attractive entry point at under $215 per share that may not be available in the future, so its as good a time as any to have this stock in your portfolio at a reasonable rate. So without further ado, let’s take a look at how why BABA is a must-have for now and the future.
Impressive Recent Performance
Alibaba logged impressive numbers in its most recent quarters, seeing double-digit revenue growth across all its business segments. Overall, total revenue increased by 38%, while core business also grew by 38%, which is primarily due to an increase in its customer base, competitive pricing strategies, and expanded product range. The company’s revenue growth is 19% higher than China’s e-commerce revenue growth in the past year. At the current rate, the company will outpace international e-commerce growth of 11% through 2025. Its core commerce business constitutes roughly 87% of its total revenues, a number which continues to rise with every passing year.
Like its American counterpart, Amazon, the company has a well-diversified revenue-mix. The company has three other reportable segments apart from core commerce – Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives. Revenues in all three segments increased by double-digits in the past quarter, benefiting from tail-winds across each segment.
Perhaps the most impressive is the company’s cloud segment, which saw revenues grow by 62% year-over-year, and with more companies adopting digital business models, expect this number to grow.
The international cloud computing markets are set to grow at a staggering 18.5% in the next five years. Alibaba’s cloud computing segment is currently growing at three times that rate, which demonstrates the immense potential of the company in gaining significant market share in this segment.
Crisis-Proof Business Segments
The economic fall-out from the virus outbreak has resulted in massive unemployment numbers throughout the world. Liu Chenjie, a chief economist at fund manager Upright Asset, writes that as many as 205 million workers in China were forced into frictional unemployment due to the pandemic.
With the crippled job market, more and more people are looking to re-ignite their entrepreneurial spirits and set up online businesses to substitute their incomes. According to a report, more than 30,000 people are opening their e-commerce stores on Taobao, Alibaba’s largest e-commerce website, which mainly caters to small business and individual sellers.
Therefore, it is likely that the website will witness a substantial increase in the number of registered merchants and buyers on its website since online shopping seems to be the only short-term solution for most people during the outbreak.
The company’s “innovation initiatives and others” business are also thriving in the crisis. Specifically, Alibaba’s enterprise communication and collaboration app, DingTalk, has become the go-to communication platform for people working remotely. Since the outbreak, the app is number 1 in Apple Stores downloads in the business category. Apart from the businesses, students are also using the app to communicate with their teachers and peers.
Alibaba has also been crafty with its strategic collaborations, which are now paying dividends for them in this crisis. The company’s ELEME platform is working with Freshippo to provide delivery services from local restaurant chains. What’s more, 20,000 small restaurants have already joined ELEME, a number which is likely to grow leaps and bounds in the next few months.
It seems clear that Alibaba has become an integral part of the lives of the Chinese and is deeply entrenched in the country’s economic ecosystem.
Valuation
| Company | Current Price | PE Ratio | PEG Ratio | Earnings Yield % |
| Amazon.com Inc | 2168.87 | 94.26 | 2 | 1.06 |
| Alibaba Group Holding Ltd | 199.44 | 21.47 | 0.68 | 4.66 |
Alibaba has had an impressive run in the past six years or so, with double-digit gains in its revenues each year. However, despite the impressive performance, all the metrics presented above suggest that the Alibaba is undervalued at the moment.
I would want the stock to be trading at similar multiples to Amazon, considering the company boasts better margins, higher revenues, and higher growth. Not to mention the fact that Apple often finds itself at loggerheads with the U.S. government, but Alibaba is considered a key stakeholder in China, and therefore has a lot of clout in that economy.
This Means War
Although it’s been a while since the U.S.-China trade war has dominated headlines, we expect the issues to resurface once the Covid-19 crisis is over. Economic growth for the country sank to a multi-decade low in the past year. Exports slowed down drastically, which impacted several leading companies in China. However, Alibaba has downplayed the concerns about the impact of the trade tensions on their business. Joseph Tsai, Alibaba’s executive vice-chairman, stated in a conference call last year that “the vexing issues in trade negotiations will resolve themselves as the Chinese economy is already evolving to close the gap between the interests of the U.S. and China.”
Furthermore, executives have re-iterated that most of its business comes from domestic e-commerce; therefore, the effect of the slowdown in cross-border transactions between the USA and China is limited. Forecasters feel that a truce between China and the USA is likely to revive consumer activity in China. An interim deal has already been signed between the two countries, which cancels the additional planned tariff hikes on Chinese goods.
Land of The Rising Sun
These are unprecedented and tough times in which we live, and it doesn’t seem like things will get better quickly. However, one thing to note is that the first epicenter of the virus, China, is now open for business while Western Europe and the U.S. continue to deal with the crisis. Undoubtedly, China needs the world to open to sell its products, but the fact that the country is getting back on track will be music to the ears of Alibaba and other Chinese firms.
Bottom Line on Alibaba Stock
The coronavirus epidemic is set to dent first-quarter revenues for Alibaba, but looking at analyst estimates, it doesn’t seem that it will have a long-term impact. The PEG ratio of BABA signals a substantial buying opportunity, which may get even better if the current market sell-off continues. Alibaba has a dominant hold in several sectors of the Chinese economy, particularly in segments that will see a boost in revenue owing to the prolonged nature of the pandemic. It also has excellent relative value as compared to Amazon, offering a pristine balance sheet and attractive margins.
Let’s end the article with a bold prediction, Alibaba will be the next company to achieve a valuation of U.S. $1 trillion, and its stock price is likely to double in the coming years. If you don’t load up on this stock in the downturn, an opportunity like this may never present itself again.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.