Chinese tech companies have recently been at the receiving end of restrictions imposed by the Chinese government. Alibaba (NYSE:BABA), being the largest tech conglomerate, has been a frequent target.
The Chinese government has been especially concerned about Alibaba’s rampant user data collection. In April, China imposed a $2.8-billion fine, while discarding Alibaba’s exclusivity policy towards sellers. Moreover, Alibaba’s financial arm, Ant Financials, was asked to register as a financial holding company so that it could be regulated.
The stock price has dropped from $319 a share in October 2020 to $170 per share as of this writing. I am bullish on the stock. (See BABA stock charts on TipRanks)
BABA Stock Undervalued
Alibaba's share price has been declining. However, consistent earnings growth has made the stock look heap. The company's trailing price-to-earnings ratio is currently 21.6.
Per analyst estimates, the forward P/E ratio is 2.33. For comparison, Amazon's (NASDAQ:AMZN) trailing and forward P/E ratio is 60.6, and 52.1, respectively.
Alibaba stock appears to have a cheap valuation at the moment, with growing revenues.
Impressive Financials Coupled with Strong Growth
Alibaba’s revenue jumped 41%, to $109 billion, during 2020. The pandemic was a major factor for the massive surge, as more customers opted for online services.
The first quarter of 2021 saw the Chinese conglomerate clock in $32 billion in revenue, a 34% year-over-year increase. Total company revenue is expected to reach $143 billion for 2021.
Moreover, the company manages to stay highly profitable even while being burdened with unfavorable regulatory policies. Alibaba has converted $3.2 billion of its first-quarter revenue into free cash flow. It has a total of $72 billion in cash, cash equivalents, and short-term investments.
In addition, the company had 1.18 billion yearly active users over a period of 12 months ending on June 30. This figure is 45 million higher than the last quarter. Alibaba’s mobile users count leaped to 939 million, which is 14 million higher.
Political Risk Can be a Spoiler
Chinese authorities unleashed a series of regulatory curbs after founder and CEO Jack Ma made disapproving remarks about the Chinese financial system in 2020.
The involvement of the Chinese authorities has stoked fear among investors. Consequently, stocks have been dropping for the past 12 months. Moreover, investors are unsure about the type of regulations that can be imposed in the future. Thus, political risk will be a deciding factor while assessing how lucrative this stock can be down the line.
Wall Street's Take
According to TipRanks analysts rating consensus, Alibaba stock is a Strong Buy. Out of 22 ratings, there are 20 Buys, one Hold, and one Sell.
The average BABA price target is $272.48. The stock price targets fall between a low of $190 per share, and a high of $336 for a share.
Bottom Line
Alibaba offers strong growth, robust financials, and an impressive valuation. However, as mentioned, there are chances of political risk that investors cannot ignore. Although risky, BABA stock can be a great option for those bold enough.
Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article
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