Shares of Chinese e-commerce giant Alibaba Group Ltd. (BABA, Financial) have fallen nearly 10% over the last 10 days. The drop occurred after the U.S. announced it will impose 10% tariffs on an additional $200 billion worth of imported Chinese goods.
The announcement sent Chinese stocks plunging as investors feared the potential impact on the Asian country’s economy. Alibaba, which in fiscal 2018 had 74% of its revenues coming from China, is perceived to be a potential victim if the trade war continues. As such, the company’s stock has been under pressure in recent days.
The company’s growth prospects, however, driven by its global expansion plan and the rapidly growing Chinese e-commerce market could provide investors with a different view of the future as it continues to gain traction in more markets.
While there is a compelling argument for Alibaba’s recent stock price decline, some analysts suggest the overall impact on the company’s valuation might be a little overblown. In fact, some have set price targets as high as $275 per share for the company’s stock, which equates to a price-sales ratio of about 18.77 times based on fiscal 2018 sales.
Looking at Alibaba’s price-sales ratio over the last 12 months, 18.77 times would be on the higher side. The current price-sales ratio of about 12.7 times, however, appears very lucrative. The average of about 15 times over the last 12 months implies the stock’s recent decline might have taken the price far too low, thus creating an opportunity for value investors.
From a fundamental perspective, Alibaba has enjoyed a strong stream of revenues over the last three years, with its top line tripling. On the other hand, its bottom line increased by 149% over the same period. Much of this growth has been driven by its expansion in China, where it has been acquiring locally-based retailers, as well as global expansion.
Over the last three years, Alibaba has made significant investments in local grocers and electronics chains and now holds stakes in electronics retailer Suning, Intime Retail and Sun Art, one of China’s largest grocery chains, among others. This will help the company to capitalize fully on the rapidly growing e-commerce market in the country. According to a research report published last month, China’s online sales are projected to exceed $1 trillion in 2018.
In the most recent fiscal year results, Alibaba reported $768 billion in gross merchandise volume transactions. Given it is the largest online shopping marketplace in China with over 70% market share, its future in the local market looks secure.
The company will also benefit over the next several years if the current growth rate of online shoppers in the country is maintained. Currently, online sales only account for about 15% of total retail sales in China. This means there is still a huge opportunity for growth in the world’s most populous country.
Alibaba has also started gaining traction in its cloud business. This is another avenue that could boost its growth prospects going forward, thereby making it an attractive opportunity for growth investors. In fiscal 2018, the company’s cloud business accounted for 5% of total revenue after growing 101% from the previous year.
It has since become one of the top six technology companies battling for leadership in cloud services. So if it can replicate the success achieved by the likes of Microsoft Corp. (MSFT, Financial) via Azure and Amazon's (AMZN, Financial) Web Services, then this revenue stream could play a key role in compensating for the slowdown caused by the trade war between China and the U.S.
In summary, Alibaba’s top line will be affected by the ongoing trade war. Some analysts have suggested the general impact on the Chinese economy could escalate to several other countries that export products to the Asian country. Whether that will have an effect on sales of local companies like Alibaba remains to be seen.
Even with the expected slowdown in top-line growth, however, the net impact on the company’s stock price appears to be overblown, judging by the recent decline. Therefore, with the company’s expansion and businesses gaining momentum, it is possible Alibaba's stock could be relatively undervalued, thereby presenting investors with an opportunity to buy on the dip.
Disclosure: I have no positions in the stocks mentioned in this article.
