The case for not owning a stake in China’s e-commerce powerhouse Alibaba Group (NYSE: BABA) has been strong enough since late 2020. That’s when the rapid growth of online shopping spurred by the COVID-19 pandemic started to slow down. And that’s also when regulators in Beijing began a sweeping crackdown on many of China’s top technology companies. Economic malaise stemming from the country’s long-lived COVID-19 lockdowns has crimped much of China’s consumerism in the meantime.
As the old saying goes though, nothing lasts forever. The forces that have driven Alibaba shares down more than 75% from their 2020 peak are not only quietly abating, but they may have already reversed course. Alibaba stock should do the same soon enough.
Green shoots popping up in China
China’s economy still has problems, to be sure. Chief among them is its real estate market. Not unlike what’s taken shape within the United States, China’s real estate prices soared to unsustainable levels last year and early this year. Now, those prices are unraveling, although according to Oxford Economics, it could take between four and six years for the nation’s real estate prices to fully stabilize.
There are enough green shoots popping up elsewhere in China, however, to give Alibaba a much-needed lift.
Take last month’s industrial output as an example. China’s factories made 6.6% more goods in November than they did in the same month a year earlier. That’s not just an improvement on October’s year-over-year growth pace of 4.6% — that’s the fastest growth in China’s industrial output seen in nearly two years.
The country’s consumers are doing their part, too. Although the figure actually fell short of the expected growth of 12.5%, last month’s retail sales growth of 10.1% is still impressive even if it’s being compared to a lockdown-stymied year-ago number. It’s also the fourth straight month China’s retail consumption growth rate has accelerated.
This tailwind is proving particularly bullish for e-commerce platforms like Alibaba’s. The country’s postal service reports it delivered a record-breaking 120 billion packages this year as of the first full week of this month, already eclipsing the entirety of last year’s tally by 8.5%.
Don’t be surprised to see more of the same going forward as Beijing is promising more stimulus (especially on the real estate front).
Alibaba is rightfully regrouping its e-commerce business
Alibaba isn’t just e-commerce, of course. While its Tmall and Taobao online shopping platforms were already firing on all cylinders before October and November’s retail sales data showed accelerating growth in the region, these businesses only account for about half of the company’s top line. The other half comes from cloud computing, logistics, digital content and apps, and localized business services. With the exception of its Cainiao Smart Logistics Network, all of these other profit centers are growing faster than Alibaba’s e-commerce business; the broad economic tailwinds driving strong retail sales growth works in these non-consumer-facing businesses’ favor, too.
It’s an overhaul of Alibaba’s e-commerce arm, though, that’s arguably going to light a new fire under its stock.
Yes, it would be naive to ignore the advent of Temu parent PDD Holdings‘ e-commerce presence. It’s a competitive problem for Alibaba both inside and outside of China. PDD has been working to penetrate overseas e-commerce markets, and it’s also cleverly working with wholesalers and distributors (as opposed to retailers) to source many of the goods it sells online via Temu. Moreover, PDD’s Temu is making inroads in overseas markets by helping brands navigate the complexities of simply selling to foreign buyers, something Alibaba arguably didn’t do quite as well.
Alibaba is finally responding, however. For instance, earlier this month, the company unveiled an artificial intelligence (AI)-powered chat platform built from the ground up specifically to serve southeast Asia’s sellers and shoppers. It’s an important development simply because the region’s e-commerce market is now one of the faster-growing ones. Moreover, Alibaba’s AI-powered chat tool isn’t something PDD’s Temu can readily replicate.
It’s also worth noting that this technology likely just marks the new beginning of innovation Alibaba should have been doing anyway once Temu started getting too big to ignore. As co-founder Jack Ma said in a pleading memo delivered to Alibaba employees last month, it’s time for the company he created to “correct its course.”
Alibaba stock is worth the volatility ahead
Alibaba’s turning the corner. However, just because the worst of the economic headwinds are in the past and its problems are now clearly defined doesn’t mean the road to recovery will be easily navigated. Expect some stumbles from the company and the stock.
Any such short-term setbacks are worth waiting out for long-term investors though. Priced at only a little more than 8 times this year’s projected earnings and less than 8 times next year’s earnings — which should be up 9% year over year on comparable sales growth — this stock’s got room for much more upside, even if it won’t get there in a straight line.
In this vein, of the 59 analysts keeping tabs on this ticker, 43 of them rate it as a strong buy. Their consensus price target of $118.66 is also 59% above the stock’s present price. Analysts can be wrong, but that’s a strong majority calling out the shares as undervalued given the company’s known risks and prospects.
Don’t overthink this one.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
1 Growth Stock Down 77% to Buy Right Now was originally published by The Motley Fool
