In the last year, technology stocks have been on an absolute tear. The COVID-19 pandemic acted as a massive tailwind for companies in e-commerce, cloud computing, collaboration, and several other tech verticals. However, one China-based tech stock- Alibaba has grossly underperformed its peers. Shares of Alibaba (NYSE: BABA) are trading 28% below its record high making it an attractive buy right now.
Alibaba continues to fire on all cylinders
In the December quarter, Alibaba reported sales of $33.8 billion, indicating an increase of 37% year over year. Comparatively, its net income was up 27% at $9.1 billion, which suggests a healthy profit margin of 27%.
Alibaba is one of the largest e-commerce companies in the world with an annual GMV (gross merchandise volume) of over $1 trillion. It accounts for the majority of online sales in China which is also the biggest e-commerce market in the world.
Alibaba is a profitable tech company and is growing at a fast clip across verticals including e-commerce, cloud computing, fintech, and logistics.
Alibaba also has a strong balance sheet and ended 2020 with $47.8 billion in cash, $22.1 billion in short-term investments, and close to $37 billion in other publicly traded entities. Comparatively, its total debt stands at just $18 billion. We can see the technology giant has enough liquidity to reinvest in research and development as well as grow inorganically via acquisitions.
In the first nine months of fiscal 2021, Alibaba’s operating income stood at $14.9 billion and might end the year with an operating income of close to $20 billion.
Another reason to be bullish on BABA stock is its strong top-line growth in the cloud business where sales were up 50% year over year. Alibaba’s cloud business also reported its first profitable quarter in terms of adjusted EBITDA. Most experts believe cloud computing is still in its infancy in China and other Asian countries, giving Alibaba enough room to keep growing its revenue and profit margins in this vertical.
BABA stock is undervalued
Alibaba stock is valued at a market cap of $614 billion indicating a forward price to sales multiple of 5.5x. Comparatively, its price to earnings multiple is also cheap at 25x. Analysts tracking Alibaba expect the company to increase sales by 39% year over year to $108.4 billion in fiscal 2021 and by 31% to $141.8 billion in fiscal 2022. Comparatively, earnings growth is forecast at 26% for 2021 and 15.3% for 2022.
Wall Street also has a 12-month average target price of $325 for Alibaba stock which indicates its trading at a discount of 35% right now.
However, investors might argue that BABA stock is cheap for a reason. The Chinese government has cracked down on the tech heavyweight in the last few months and has also blocked the IPO of Alibaba’s financial arm- Ant Group. It also launched an anti-trust investigation into Alibaba in December 2020 and recently asked the company to sell off its media assets.
It might seem that Alibaba stock's price decline is exaggerated and its revenue growth will remain strong given multiple secular tailwinds including an increase in purchasing power of China’s middle class and strong e-commerce sales.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
