Investors in Chinese stocks are bound to be feeling disappointed – while U.S. stock markets are scaling new highs, Chinese stocks have tumbled to their lowest levels in five years. The performance has been particularly bleak for some companies; last month, Alibaba Group Holding (BABA) shares briefly fell below their IPO price.
For context, Alibaba went public in 2014 and priced the shares at $68. The Chinese e-commerce giant raised $21.8 billion from the offering, which was the biggest IPO until then. However, after almost a decade, BABA shares currently trade back around their IPO levels, even as U.S. tech peers like Amazon (AMZN) have risen exponentially over the same time period.
The Plight of BABA Stock: A Macro Perspective
Nothing much has gone right for BABA stock over the last few months, but the recent fall in the stock is largely the result of broad-based selling in Chinese shares, rather than any company-specific issue.
Sentiments toward Chinese stocks are quite negative, as most economic indicators suggest further softening of the world’s second-largest economy. Then there are structural issues, including the high government debt, a real estate slowdown, and troubles in the banking sector (including shadow banks). Add the aging population into the equation, and investors have yet another reason to shun Chinese stocks.
The Devaluation of Chinese Stocks
While the country’s slowdown could mean that Chinese companies might not report the kind of top-line and bottom-line growth they notched during the previous decade, the valuations of Chinese stocks have also taken a beating for good.
President Xi Jinping’s economic policies have created an aura of uncertainty for investors, which – coupled with the escalating tensions between China and the Western world, especially the U.S. – have made investors wary of Chinese stocks. The sector is now “uninvestable” for many, and investor pessimism is manifesting in the form of low valuations for Chinese stocks, which appear to be the cheapest among major economies.
The possibility of Donald Trump returning to the White House is not helping the cause of Chinese companies, as it was under his administration that the U.S.-China trade/tech war started.
That tech war is already taking a toll on Chinese companies. In Q4, Alibaba scrapped plans to list its Cloud business, blaming U.S. chip export restrictions. The IPO was part of the company’s reorganization into six business units, which would have helped unlock value, as the sum of the parts valuation of the Chinese tech giant could be more than the combined entity.
Outlook for Alibaba and Chinese Stocks
The outlook for Chinese stocks as an asset class is looking quite hazy. Despite the increased risks, I would still bet on Alibaba stock, given the company’s low valuations. With its single-digit price-to-earnings multiples, high free cash flows, and reasonably good growth outlook, Alibaba stock looks worth the risk.
I believe that Chinese stocks are now at the capitulation stage, and there is widespread fear. While the risks related to Chinese stocks are real, the world’s second-largest economy is not collapsing, but is rather resetting to a lower growth rate. The transition period has been painful, and the next few months might be quite volatile as well.
However, I am in the camp that believes that Chinese stocks, including Alibaba, will eventually recover and go back up. While it might not provide much comfort to investors who have seen the value of their BABA holdings plummet over the last few months, the company’s co-founder Jack Ma and current chairman Joe Tsai also loaded up on millions of dollars of Alibaba shares last month.
Analysts’ Take on BABA Stock
Jefferies has listed Alibaba among its top global picks, and its target price for BABA of $133 implies an upside of more than 80% over the next 12 months.
BABA has a consensus rating of “Strong Buy,” and its mean target price of $116.19 is 60.6% higher than current price levels. The stock trades south of the Street-low target price of $85, while the Street-high target price of $150 implies the stock more than doubling from these levels.
For long-term investors who can be patient amid the current volatility, Alibaba looks like a good stock to buy. To sum it up, while being conscious of the increased risks associated with Chinese companies, I would follow Warren Buffett’s old quote and be “greedy when others are fearful.” While BABA stock could still go down from these levels, I find the risk-reward quite compelling at these prices.