Stocks

The Value in Alibaba (BABA) Looks Too Good to Be Ignored

Alibaba - maybefalse / Getty Images
Credit: maybefalse / Getty Images

When I am thinking of writing about something, one of the first things I do is check back to see what I have said on the subject before. There is, as my mother liked to say, nothing new under the sun, so I can usually find a reference to a stock somewhere over the twelve years of archived material here at Nasdaq.com. So, as I have been thinking about Alibaba (BABA) over the last few days, I looked and found that I last mentioned the stock in early 2022, a very different time in its history.

The article I wrote back then suggested a trade that involved buying BABA which, if you look at the 5-year chart below, seems like it was not a good idea. However, in the two weeks following that piece, the stock climbed, which allowed me to reset my stop to a level that enabled me to make a small profit on the trade and, more importantly, to get out before the long-term decline set in.

BABA chart

That decline has been quite spectacular. BABA, the Chinese internet giant, was a classic example of a stock being overvalued in the post-covid environment, when companies that had benefited from pandemic conditions saw their stocks valued as if those conditions would last forever. Eventually, of course, we all did emerge from our homes and a semblance of normality returned. That caused a pullback in many of the “covid darlings”, but that pullback was exaggerated in BABA and other Chinese internet related stocks due to some domestic issues in China.

The Chinese Communist Party (CCP) under President Xi has shown itself to be open to some degree of capitalism since he took over in 2012, but one should never forget that the number one aim of the CCP is to retain power. In that context, it is no surprise that the increased reliance of the Chinese people on a few tech firms and their growing influence as a result was seen as a threat by China’s leaders. Restrictions followed, restrictions that seemed to be designed to let the likes of BABA and BIDU know who the boss was rather than to clip their wings economically.

Still, the effect was enough to cause the stock to fall more than 75% from its highs. Growth stalled and even the relatively low-for-a-tech-company P/Es of Alibaba looked far too high. Now, the political climate, or at least the perception of it, has improved and valuation metrics suggest that BABA is a buy, maybe even a steal at current levels.

Politically, we can’t know for sure what is in the minds of China’s leaders, nor what they will feel the need to do in the future. Many people have been driven crazy over the years trying to do that, but in this case the reality of the situation is really not the point. As is so often the case in markets, and in life too I guess, the point is the perception. Currently, with no headlines out there about restrictions on Chinese tech companies, the perception is that they are being allowed to concentrate on their businesses and resume growing and will be allowed to do so in the future.

That means that traders and investors are currently evaluating BABA based on valuation metrics, and on that basis, it looks like a must-buy. It has a trailing P/E of around 13.5, a forward P/E of just under 8, and a PEG ratio of 0.56. The PEG ratio expresses the relationship between the current P/E and growth, and a reading anywhere below 1.0 indicates that a stock may be undervalued. On all three metrics, BABA looks like a bargain.

Still, if you are a regular reader, you will know that my dealing room training leads me to view an idea as just that, an idea, unless the 1-year chart suggests decent entry and exit points based on current levels. Only then does an idea become a viable trade.

BABA chart

The low of $68 reached in January was the stock’s lowest point since 2016. That and the quick bounce that followed hitting that level makes $68 look like a pretty solid support, certainly strong enough to be a logical point off which to set a stop loss. Even if we allow for BABA’s inherent volatility and set a stop well below that level, say at around $65, the potential loss is still under 10%, and, with just a return to the July 2023 highs around 102 representing a potential profit of more than four times that, the risk/reward supports the contention that buying BABA is a viable trade, not just an idea.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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