While the stock market enjoyed a banner year in 2023, Alibaba (NYSE:BABA) didn’t join the festivities. But the much-maligned stock could be ready to bounce back in 2024.
Over the last few years, it has been a long, hard road for the Chinese mega-cap stock and its shareholders. Its underperformance continued a trend; the former high-flyer has sadly lost 75% of its value from its peak in late 2020, falling from over $300 a share to just $73.01 today. This downfall was even more jarring because it came at a time when tech stocks and the broader market indices raced higher.
However, Alibaba stock now looks like a deep-value play that can begin to reward investors in 2024 and beyond. The stock now looks compelling from a risk-reward perspective. I’m bullish on Alibaba stock based on its strikingly cheap valuation, its efforts to ramp up its return of capital to shareholders, and the immense upside forecast by Wall Street analysts.
Exploring Alibaba’s Valuation
After the steep decline in share price, Alibaba trades for just 8.4 times earnings. It’s difficult to overstate how cheap this is. Chinese stocks are generally cheaper than their U.S. peers, but Alibaba is significantly cheaper than the typical U.S. or Chinese stock.
Alibaba’s valuation represents a steep discount to the S&P 500 (SPX), which trades for an average price-to-earnings multiple of 21.9. It’s also cheaper than the Chinese market as a whole. The iShares MSCI China ETF’s (NASDAQ:MCHI) average price-to-earnings multiple is 11.7.
To be fair, some of Alibaba’s sell-off over the last few years is understandable. Growth has slowed, and shares took major hits when the company nixed plans to spin off Ant Financial in 2020 and its cloud business in November.
But at this point, the sell-off seems overdone, and these disappointments are likely baked into the share price. Perhaps the best illustration of this is the striking fact that the stock price is now back to where it was following its 2014 IPO, even though its earnings are now five times higher and its revenue is 10 times higher than it was then.
In 2020, Alibaba’s market cap surpassed $800 billion. Today, it’s below $200 billion. In an environment where many other tech stocks have run up to frothy valuations, making it difficult to find bargains in the tech sector, Alibaba’s beaten-down valuation looks appealing.
Plus, it’s not like the company isn’t working on turning things around. It hired a new CEO last summer, and co-founder Joseph Tsai took over as chairman. The massive conglomerate was also restructured into six distinct business units. Each of these units now has its own management team and Board, which should increase accountability and autonomy.
The Emergence of a Dividend Stock
In addition to this incredibly cheap valuation, Alibaba is attractive because it is now a dividend payer. While its dividend yield of 1.3% isn’t going to get income investors’ hearts racing, it’s a positive move from the company and shows that it’s focused on rewarding its shareholders. There is also the possibility that this dividend payout can increase over time as the company grows its earnings.
In addition to paying its shareholders this new dividend, Alibaba is returning capital to shareholders through share repurchases. The company bought back a massive $9.5 billion worth of its own shares in 2023. Alibaba is still authorized for another $11.7 billion of share repurchases under its current share repurchase plan, so more buybacks seem likely, going forward.
Share repurchases can benefit shareholders, as they reduce the number of shares outstanding and can be an indicator that management believes its stock is undervalued.
Is BABA Stock a Buy, According to Analysts?
Turning to Wall Street, BABA earns a Strong Buy consensus rating based on 18 Buys, two Holds, and zero Sell ratings assigned in the past three months. The average BABA stock price target of $125.92 implies 72.5% upside potential.
Furthermore, the highest price target of $158, from CLSA’s Elinor Leung, implies more than a double from here. Even the lowest price target of $90 from Morgan Stanley’s (NYSE:MS) Gary Yu is significantly higher than the stock’s current price, suggesting that the stock may have capitulated at this point.
An Overall Positive Outlook
Wall Street analysts are collectively bullish on Alibaba, and they aren’t alone. TipRanks’ Smart Score system also views the stock favorably. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight key market factors. A score of 8 or above is equivalent to an Outperform rating. Alibaba boasts an Outperform-equivalent Smart Score of 8.
While this one-time market darling has been a major disappointment for investors in recent years, it now looks compelling from a risk-reward perspective. Its performance has been ugly, but this is often where the best opportunities abound.
The tech mega-cap trades at a paltry valuation at a time when many of its tech sector peers have soared to nosebleed valuations. It’s a bargain compared to these tech stocks and to the broader U.S. and Chinese markets as a whole, and it gives investors exposure to the same long-term themes that other tech stocks are lauded for, including artificial intelligence, cloud computing, and e-commerce.
Furthermore, the company recently initiated a dividend and has been returning a surfeit of capital to its shareholders via share buybacks. Lastly, Wall Street analysts believe that the stock has major upside potential, and the Smart Score system also predicts that it will outperform the market, meaning that Alibaba could be a surprise winner in 2024.