Key Points
Alibaba stock has seen a significant decline after earnings. However, the reasoning behind the decrease doesn’t seem to hold up.
There is substantial opportunity supported by macro trends in China and evidence of a strong financial recovery in the business, making it a favorable investment at present.
Several analysts and influential investors recognize this potential, with the stock currently at a point of maximum pessimism, which historically presents opportunities for significant gains.
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In the realm of internet stocks, Alibaba NYSE: BABA stands out as a particularly compelling option. With prices below $80.0 per share, the potential for this stock to soar and align with its fair value is significant and will be revealed shortly.
Even Charlie Munger, Warren Buffett’s longtime associate at Berkshire Hathaway NYSE: BRK.A, had enough faith in the company’s financials to invest in it. His approach to value investing led him to maintain his position in the face of the stock’s volatile swings.
However, both Charlie and many other investors made the mistake of categorizing Alibaba as a technology company, when in reality, it falls under the consumer discretionary sector. This perception is why Alibaba is currently presenting the best opportunity for investors.
Bears can hide, but they can’t run
The bears are attempting to push the stock lower with weak excuses, such as the recent announcement of the cloud business’ spinoff being withdrawn. However, these bearish viewpoints are being countered by bullish sentiment within the market.
While many investors had anticipated the potential value realization from these spinoffs, the new pivot in strategy may actually be more favorable than it appears. Given that the Chinese retail segment accounts for 86.5% of the company’s total revenue, a delay in the spinoff should not justify a sell-off exceeding 10.0%. The strength of the Chinese consumer is expected to drive the EPS expansion that patient shareholders are owed.
Similar misconceptions have impacted other stocks in the past, such as Tesla’s NASDAQ: TSLA, when bearish sentiment incorrectly criticized the company’s software arm, despite it primarily being a car manufacturer.
Chinese retail sales have shown a 7.6% year-over-year increase in October, indicating the government’s efforts to stimulate the economy and combat low inflation levels.
Competitors like JD.com NASDAQ: JD have seen an 18.3% rise in the past month, as their earnings surpassed analyst expectations riding on this consumer momentum.
Although Alibaba reported strong earnings, with an 18.0% increase in total China commerce revenue and a 53.0% jump in international commerce sales, the decision to not spin off the cloud business, representing only around 15.0% of total revenue, caused a significant drop in the stock price.
Maximum pessimism
Despite its current challenges, the broader investment community remains apprehensive about investing in China. The recent decline in Alibaba is likely to drive away any remaining retail investors, especially those influenced by the misguided belief that the withdrawal of the cloud spinoff plan devalues the company. In reality, the stock is currently undervalued, trading at prices not seen since its IPO in 2014.
The financial results for the third quarter of 2023 demonstrate that the company has not only expanded its revenues but also significantly improved its margins.
The return of the Chinese consumer has supported management’s cost-cutting efforts, resulting in an operating margin of 16.0% compared to 13.5% a year earlier. However, the most significant swing in the story is the net income margin.
From a loss of 20.6 billion RMB in 2022 to a quarterly gain of 27.7 billion RMB currently, the net margin has increased to 12.3% (still below its five-year average margin of 25.3%), along with enhanced return metrics such as ROIC (return on invested capital) and ROE (return on equity).
Although the business is displaying robust performance, an unrelated factor in the cloud business is dragging down the stock price. As Sir John Templeton would assert, this signifies the point of maximum pessimism.
Despite the prevailing negative sentiment, analysts are still willing to stake their reputation by setting a price target of $130.5 per share, representing a 68.4% increase in the stock price to verify these projections.
With PDD NASDAQ: PDD earnings on the horizon, a similar earnings beat driven by a robust consumer market could prompt the market to recognize the potential that is being overlooked in the largest retailer and wholesaler in China: Alibaba.Before you consider Tesla, you’ll want to hear this.MarketBeat keeps track of Wall Street’s top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… and Tesla wasn’t on the list.View The Five Stocks Here Click the link below and we’ll send you MarketBeat’s guide to investing in electric vehicle technologies (EV) and which EV stocks show the most promise. Get This Free Report
