Even before the meltdown in high-growth tech stocks, Alibaba (NYSE:BABA) shares were taking a beating. BABA stock is still struggling to find its footing, and while that can be frustrating for the bulls, it’s also an opportunity.
However, to seize that opportunity, investors need to be patient. They also need to have some long-term perspective.
Shares have come under fire as the Chinese government has taken measures to reduce Alibaba’s dominance. The antitrust crackdown is negative news and not something that investors would like to hear about any of their holdings, domestic or foreign.
However, it would be foolish not to acknowledge that it’s slightly more concerning that the crackdown is coming from China. The government has shown it’s willing to flex its muscles regardless of whether its decisions come across as fair. That said, it would be equally foolish to think that these actions will be the demise of Alibaba.
Buy When There’s Blood
Baron Rothschild is famously quoted as saying, “the time to buy is when there’s blood in the streets.” Although, many argue the original quote is then followed by, “even if the blood is your own.”
Warren Buffett has a similar, albeit less grim, take: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Both perspectives boil down to the same thing though, which is to buy when a quality asset is on sale. For BABA stock, that sale is now. On March 25, shares broke to multi-month lows and are now about 30% below the all-time high. At the peak of its decline — which came on Dec. 24 — shares were down 33.8%.
Perhaps Alibaba makes new lows. Maybe it doesn’t. It doesn’t really matter though. The important thing here is that we have a huge opportunity to buy an incredible firm with strong growth in multiple secular themes at a big discount.
Breaking Down Alibaba
Let’s do a quick breakdown with BABA stock. This company commands a $614 billion market capitalization despite the recent selloff. Its primary driver of growth is e-commerce, but it also has a formidable cloud-computing business and a media unit.
The stock pushed to all-time highs in the fourth quarter as Ant Inc. was preparing for a dual-exchange initial public offering (IPO). Set to go public in both Hong Kong and Shanghai, Ant was going to become one of the largest IPOs ever. That’s important for Alibaba, because it owns a one-third stake in the company. Days before the IPO though, regulators stepped and derailed it. This is why investors fear China’s government when it comes to cracking down — it’s hard to imagine this ever happening in the U.S.
Alibaba still owns its stake in Ant, and even though that stake is seemingly less valuable, Alibaba’s businesses are not. While this is negative news in the intermediate term, it creates a long-term buying opportunity.
After all, Alibaba operates in one of the largest countries and economies in the world, which continues to grow faster than any other economy close to its size.
Alibaba’s assets include the two most popular e-commerce sites in China — which is important, considering the previous point we just made about the population size. Its cloud-computing unit is also churning out solid growth. It reminds investors of the U.S.’s largest e-commerce company and how it used the cloud to fuel its growth to a $1 trillion-plus market cap.
When it comes to revenue, analysts expert 39% growth this year and 31% growth next year. On the earnings front, estimates for this year and next year sit at 27% and 16.5%, respectively. For just 19 times this year’s earnings estimates, BABA stock seems like a bargain considering its growth, assets and long-term opportunity.
Bottom Line on BABA Stock
I realize the above information is a lot to process.
BABA stock already tends to trade at a discount to its mega-cap peers here in the U.S. That’s likely because investors are less familiar with the company vs. its domestic counterparts. And more recently, it’s likely due to antitrust fears in China.
At the end of the day though, we have a fast-growing conglomerate with the most valuable assets in a secular growth industry operating in one the largest economies. Regardless of the short-term headaches, long-term investors have an opportunity here.