Alibaba Stock Has Soared. It's Still Cheap Enough to Buy

After a yearslong malaise, Alibaba stock has roared back to life, thanks to China's recent stimulus plans -- and it isn't too late to buy in.

Certainly, the present feels like an inauspicious time to buy China-based stocks. Not only have China's total retail sales increased by less than 1% since the start of 2024, but the overall economy is struggling so much that Beijing just unveiled its largest stimulus package since the pandemic, one that includes lower short-term interest rates and less onerous cash-reserve requirements for banks. Stocks have already soared in response, ignoring the shortcomings that could reduce its efficacy -- including any real solution for the country's crumbling property market.

In short, buying now, after Alibaba's stock has gained 25% to $98.70 over the past three months, feels like arriving late to a very brief happy hour and getting stuck with the bill.

Yet China's economic stimulus plan is also a sign that the government is determined to spur an economic recovery regardless of the cost. Even if this round doesn't work, Beijing's willingness to intervene should at least put a floor under consumers. Likewise, policymakers may be less likely to interfere with tech companies, which have been the main economic drivers elsewhere in the world. Alibaba, as a dominant e-commerce and cloud provider in China, should benefit both ways. With a flush balance sheet and a stock trading at 10.7 times forward earnings, it still looks like a bargain.

"Alibaba is cheap relative to its own history, it's cheap relative to its peers, it's sitting on a ton of cash and generating more cash by the day, and a lot of the headwinds are turning to tailwinds," says Burns McKinney, senior portfolio manager at NFJ Investment Group.

McKinney understands investor hesitance to invest in China given the government's history of heavy-handed interventions. The stock, however, reflects those risks and then some. It may never trade in line with Amazon.com, which fetches 36.9 times forward earnings, but he argues that Alibaba could easily reach a multiple of 15 times. Applying that to consensus earnings estimates for the next four quarters produces a stock price of $138, up 40%; applied to next fiscal year's expected earnings puts the stock at $145, up nearly 50%.

That doesn't seem wildly optimistic. For all of the concerns about the Chinese consumer, in the fiscal first quarter Alibaba's "core China commerce [business was] regaining market share with accelerating gross merchandise volume," according to Baird analyst Colin Sebastian, who rates the stock Outperform. That demonstrates that "Alibaba remains in transition on multiple fronts," he explains.

In fact, consensus calls for Alibaba's earnings-per-share growth to resume next year, climbing 12.5% year over year to $9.49, on an 8% climb in sales. That would mark its biggest year-over-year EPS growth since 2021. Online sales are expected to grow and could get a boost as the company balances the needs of customers and merchants, rather than squeezing the latter as many rivals have done. The upshot is that more quality merchants prefer Alibaba, giving it an edge in a crowded space, says Derrick Irwin, a portfolio manager with the intrinsic emerging markets equity team at Allspring Global Investments.

The real growth, however, is in the cloud, which is getting a boost from artificial intelligence. Alibaba is the largest public cloud service provider in China and throughout the Asia-Pacific region. And at just over 10% of revenue, the business seems poised to become an increasingly key growth driver as the company follows a model laid out by Amazon.

Those AI efforts aren't costing investors very much. Before the recent pop, investors were getting everything but the core retail business at 10 times earnings, and Alibaba's $20 billion net cash position "for free, " Irwin says. Even with the stock run-up, it's still a small part of the overall valuation, he explains.

Nor is Alibaba the same company it was four years ago, when it was a market darling that fetched nearly 30 times forward earnings. China's slowdown forced it to move away from a growth-at-any-cost mentality and pivot toward returning capital to investors, paying them for patience. Alibaba already repurchased roughly $10 billion of its shares in the first two quarters, with another $26 billion of unused authorized buybacks still to come. That's on top of $16 billion in dividends and repurchases last year. "Alibaba is focused on the nuts and bolts of a robust business, so if we see the economy recover, they come into that recovery in really good shape," says Irwin.

Of course, it may not be a straight shot up from here. Alibaba stock will inevitably react to every data point and policy change from China, given the world's need for reassurance about its growth trajectory. Any missteps by policymakers could hurt the shares. And analysts aren't too optimistic: Though 84% of them are bullish, the average price target is just $118.

Nonetheless, it seems more a matter of when, not if, millions of everyday Chinese start loosening their purse strings again a bit, and even a modest improvement could lead to higher consensus estimates.

"Alibaba is a good proxy for China's middle class, and growth in China isn't dead, it's just maturing a bit," says NFJ's McKinney.

One could say the same thing about Alibaba's stock.