Why Malake Believes Alibaba Shares Are Currently “On Sale”

Why Malake Believes Alibaba Shares Are Currently “On Sale”

over 2 years ago2 mins

Summary

  • Alibaba’s shares are trading at a reasonable valuation considering how fast the company is still growing.
  • The stock has been hit by China’s recent tech crackdown and ongoing US-China tensions – leaving them looking cheap.

What’s the pitch?

A long-term investment in Alibaba (ticker: BABA) with a $360 price target by 2023

What does Alibaba do?

Alibaba is China's biggest retail and wholesale ecommerce company. In addition, its cloud computing, digital media, and digital entertainment businesses are expanding rapidly. 

What’s your three-point investment thesis?

  • In my opinion, the stock’s current price-to-earnings (P/E) ratio of about 21x estimated profits means the shares are “on sale”.
  • Alibaba has roughly 90% penetration in the Chinese market and has built a massive amount of consumer data. Their technology infrastructure boosts their competitive edge for personalized marketing opportunities, and has allowed them to enter other businesses and expand their dominance.
  • Alibaba increased revenue by 41% in the year to March. This pace of growth could accelerate even further as China’s middle class expands and the company penetrates into less developed areas of rural China.

What are the key events you’re watching?

  • Any further action from China against Alibaba co-founder Jack Ma.
  • Any further regulatory action against the company after April’s $2.8 billion anti-monopoly fine.

What’s the upside potential if your thesis is correct?

I believe the shares could reach about $360 by 2023, 73% above the current price. The company's revenue and earnings have consistently been rising, while its P/E multiple has fallen. 

What are the risks you’ve spotted, and how do you plan to mitigate them?

The biggest risk associated with Alibaba is the Variable Interest Entity (VIE) structure by which it – and other Chinese companies – are listed in the US. China has never clarified its position on these VIE structures, which mean that Western investors don’t technically own any part of the Chinese firm. But considering that Chinese companies have raised billions of dollars in the US through these arrangements – bringing incredible wealth and status to the Chinese economy and tech sector – I find it very unlikely the Chinese government would undermine the arrangement.

The other major consideration is the ongoing China-US tensions over trade, geopolitics, and intellectual property. While it remains to be seen how these superpowers will resolve these serious disagreements, both countries are dependent on one another for their economic prosperity. 

Do you agree with Malake that Alibaba is “on sale”? Drop us your thoughts here.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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