Alibaba Just Surged 50%: Why There’s Still Upside
Summary
- Within two weeks, Alibaba has seen gains of nearly 50% after a continual downturn reversal
- Alibaba seem to be fundamentally undervalued according to valuation models
- Although their technical charting isn’t anything special, recent volume may prove otherwise.
Background
Alibaba. The stock that has seen some of the largest differences of opinions over the last year. From the failed ANT IPO, to increasing US and Chinese regulations, Alibaba has plummeted over 60% from all time highs since the end of 2020.Over the past year, Alibaba stock started falling along with other Chinese tech stocks on reports that officials were looking into new regulations, which included forcing delivery companies to lower fees in many parts of the country.
Due to the Russian-Ukranian war, Alibaba continued to slide during the month of March, and has led investors to rethink their positions in companies out of the country. Because they were already threatened by delistings, many investors did not like the added risk of a company like Alibaba.
However, In the past two weeks, Alibaba surged over 50% with buying volume that we have not seen in over a year. They recorded a record of 50 million transactions for a whole week straight and have seen consistently higher buying volume day after day. Typically volume like this happens for a week straight then dies off, but this consistently high volume may prove to be the start of a reversal.
Valuation
Alibaba’s Discounted Cash Flow Model
Given the conservative estimates above, Alibaba’s fair value based on future projections of revenue is around $213.73. These numbers were found using historical data and projections based on Alibaba’s last 8 earnings. Having a price target of $213.73 with an annualized return of 12.5% implies a nearly 100% upside from Alibaba’s current stock price of $50.20 a share.
Critics may say that Alibaba’s current price does not accurately reflect their intrinsic value based around the regulatory risk, however, I believe that even with a margin of safety of 12.5%, their 60% pullback from all-time highs was unwarranted. There is high upside potential as long as Alibaba consistently hits wall street’s expectations in the next few years.
Growth Factors
There are currently 1.4 Billion people living in China and over 1 Billion have internet access. And as of last quarter, Alibaba had 882 million cumulative active customers in China alone. And according to Statista, as of 2019, the average Alibaba user was spending 9000 yuan a year, which converts to roughly $1,400/annually.
To put this into perspective, Amazon, one of the most well known companies in the world, has 310 million customers worldwide who collectively spend $875 per person. Even on the higher end, the prime members still tend to spend less than the average Alibaba user according to these numbers.
Many critics will talk about how you cannot base future projections off of a company’s best year, however, I believe that they are still fundamentally undervalued to some extent.
Now the question becomes,
Why has Alibaba been falling for so long?
I believe the market sentiment has been relatively negative around Alibaba and Chinese stocks for some time now. After Alibaba went under $200, it was just article after article about Chinese regulations that stopped a lot of investors from taking a position and many selling off.
While I worry about the Chinese government using antitrust laws to reduce the amount of volume that Alibaba is getting, I don’t think this is the main concern. The SEC trying to go into Alibaba’s books may been one of the main problems, however, an article published yesterday by Evelyn Cheng on CNBC states that, “Chinese and U.S. regulators’ consultations on audit supervision and cooperation are overall going well, the commission said.”
Since March, the U.S. Securities and Exchange Commission has started to name specific U.S.-listed Chinese stocks for failing to adhere to the Holding Foreign Companies Accountable Act(CNBC).
If this continues, I believe that more investors may take Alibaba’s actual valuation into account and will see the same upside that many value investors see as well. Value investors like Monish Pobrai, Ray Dalio, and even Charlie Munger have some type of position in Alibaba.
Conclusion
Value investors have doubled down on Alibaba because they truly believe in the valuation of the stock. Based on the model above, I believe Alibaba is considerably undervalued as well. I know many stocks are not trading for their actual “fair market value” and the valuation is just something to keep in mind. I just believe that Alibaba’s e-commerce sales will stay consistent and uphold its current valuation.
Although there are regulations and potential delistings, the risk/reward for Alibaba seems positive. Their proven business model and market share seem to be just too large for Alibaba to keep on falling. This recent surge may just be the beginning of a long-term reversal for Alibaba, but time will tell.
Let me know about your comments down below!
Disclosure
I/we have stock, option, or similar derivative position in any of the companies mentioned, and plan to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
