US-listed Chinese stocks plunged late September after it was rumored that the White House was mulling over new restrictions on US investments in China. E-commerce giant, Alibaba Group Holdings Ltd (NYSE: BABA) was not spared, with shares plunging more than 5% when the news broke.
However, investors shouldn't scramble for the exit just yet. Here's why I am still optimistic about the tech giant's long-term opportunity.
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Delisting all Chinese stocks not viable
It was rumored that the US might delist Chinese stocks or ban US government pension funds from investing in Chinese companies.
However, US treasury spokeswoman Monica Crowley has clarified that the Trump administration is "not contemplating blocking Chinese companies from listing shares on the US stock exchanges."
Fellow Fool, Leo Sun, does a great job in clarifying the situation. He explained in his recent article that blocking all Chinese companies from the US exchange is an impractical solution. For one, forcing US-listed Chinese stocks off the market will hurt both US retail and institutional investors who have a large stake in US-listed Chinese stocks.
Chinese stocks are also not directly listed on the US market. It is structured as a Variable Interest Entity (VIE) and is usually incorporated in the Cayman Islands and not China. As such, a move to delist these "Chinese" stocks would also bar other overseas companies from listing in the US.
In addition, based on current regulations, for an individual stock to be delisted, it needs to violate one of the SEC rules. As such, it is highly unlikely that Alibaba will be forced to delist in America.
Alibaba fundamentals remain robust
On a company-level, Alibaba has a great business and is set to ride on the tailwinds of the expanding Chinese market. It recently told investors that it will target to serve over 1 billion annual active customers by the end of fiscal 2024, a 16% increase from the 860 million customers it currently serves.
The e-commerce giant has grown its annual revenues by an average of 56% between 2017 and 2019, adding US$33 billion to its topline in just two years.
On top of that, despite the trade war, Chinese retail sales continue to rise at a significant pace. In July, retail sales in China, increased 7.6%. Its GDP growth is also forecast at 6.2% this year. Over the longer term, China is expected to overtake the US as the number one economy in the next ten years.
In addition, to e-commerce, Alibaba is also at the forefront of cloud services and online payment. Alibaba Cloud provides remote cloud computing power, data storage and other technical services, while Aliapay, an online payment platform already boasts 600 million active users. Alibaba is, hence, well-positioned to ride the coattails of the growing Chinese economy on multiple fronts.
Lastly, Alibaba is a cash flow generative business that has been consistently profitable, a rare feat for a fast-growing tech company in today's world. Over the last 12 months, the company generated US$4.73 in earnings per share (EPS).
At its current share price of US$170.34, that translates to a price-to-earnings ratio of 36X, an undemanding valuation when you consider the company's long runway for growth.
In its most recent quarter ended June 30, 2019, Alibaba revealed a 42% increase in revenue on year-on-year, with its e-commerce and Cloud services revenue expanding 44% and 66% respectively. The company is showing no signs of slowing down as the company's total revenue was 20% higher than the three months prior.
Although Jack Ma's retirement marks the end of a legacy, Alibaba's current leadership has shown that it is more than capable of running the show. Jack Ma's retirement was announced more than a year ago, and the current crop of leaders have managed to consistently beat Wall Street estimates each quarter since.
With the share price taking a beating recently, now may be a great time to add or start a new position in the house that Jack built.
A version of this article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en.
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