The Alibaba stock price has been under pressure in the past few months. The BABA stock is trading at $205 in New York, which is about 35% below its year-to-date high. It is also at the same level where it started the year. It has a market capitalization of more than $557 billion.
Why BABA stock has crashed
There are several reasons why Alibaba stock has cratered in the past few months. The most important one is that China has intensified its crackdown against technology companies. Notably, the firm ordered Ant Financial to suspend its IPO last year and change its business model. This was a major blow to Alibaba, which owns a 30% in Ant Financial. Indeed, analysts believe that Ant’s valuation has dropped from more than $300 billion to more than $100 billion.
Recently, China has intensified its crackdown on the country’s technology companies like DiDi and ByTenDance. According to the Wall Street Journal (WSJ), BytenDance, the owner of TikTok has even abandoned its plan to have an IPO after meeting with Chinese officials.
Further, it is alleged that Jack Ma is also under investigation in China. According to Bloomberg, Alibaba’s founder has even been barred from leaving the country.
Why Alibaba stock is a buy
While Alibaba faces significant challenges, its stock is a clear buy for several reasons. First, Alibaba has a leading market share in some of the fastest sectors. Its core marketplace is the leading platform for people buying from China while its Lazada business is growing relatively fast.
The company has other growing platforms like Alibaba Cloud, Feshippo, Ele.me, and Cainiao, which is its logistics arm. Therefore, while it faces stiff competition from many upstarts, the company has a relatively impenetrable moat
Second, Alibaba Cloud is a leading platform that is equivalent to Amazon’s AWS service. According to China Watch, Alibaba Cloud has a 39.8% market share in the Chinese market. It is followed by companies like Baidu, Huawei, and Tencent. Therefore, while Alibaba will struggle to expand its cloud business abroad, the Chinese market is large enough. Indeed, its cloud revenue has grown by more than 50% in the past few quarters.
Third, the Alibaba stock seems cheap. As seen below, a DCF calculation shows that the stock is cheap by more than 36.4%. A better way to look at this is to compare Alibaba’s business with that of Amazon. In 2020, Alibaba generated more than $109 billion in revenue and a net income of more than $22 billion. On the other hand, Amazon generated more than $386 billion in revenue and a net income of more than $21 billion.
Therefore, while Amazon has better revenue than Alibaba, the latter has better margins. Now, consider that Amazon has a market cap of more than $1.88 billion. This means that either Alibaba is extremely cheap or that Amazon is extremely overvalued. Indeed, Alibaba has a forward PE ratio of 29.87 while Amazon has a PE of 67. This is notable since Alibaba has a forward PE growth estimate of 34.95% while Amazon has a growth estimate of 27%.
Alibaba stock price forecast
The daily chart shows that the BABA stock price has formed a descending channel. It is also between the 61.8% and 78.6% Fibonacci retracement level. Further, the stock remains below the 25-day and 50-day exponential moving averages. Therefore, while the stock will likely remain under pressure, I suspect that it will bounce back later this year as investors rush to buy the dip.