Alibaba’s [BABA] share price has taken a beating in recent months.
Down 7.05% for the year-to-date (as of 26 May’s close) regulatory pressure — including a hefty $2.8bn fine — has taken its toll on investor confidence.
But could the storm finally be passing? That’s certainly the view of some analysts, including CitiGroup’s global head of investments, who believes underperforming China tech stocks could be some of the best value opportunities right now.
Alibaba's YTD share price fall
Is there a near-90% upside in Alibaba’s share price?
Oleh Kombaiev, writing on Seeking Alpha, argues that Alibaba’s share price growth is not linear when compared to its revenue growth, unlike its western equivalent Amazon [AMZN]. However, over time it will change to a linear model, which would mean that the “company is significantly undervalued” at the moment.
“Alibaba's revenue growth rate has been growing over the past year, and, judging by analysts' expectations, will grow in the future, but the P/S multiple is now at a historical low. If we assume that this situation is not normal, and the balance will be restored here in the nearest future, this means an increase in the price of the company's shares [of] over $400."
Kombaiev adds that the confrontation between Beijing and Alibaba appears to have passed its active phase and that, while Alibaba’s growth prospects have been lowered, they haven’t plateaued. Reasons for optimism include China’s growing middle classes and strong economy, according to the writer.
“Alibaba's revenue growth rate has been growing over the past year, and, judging by analysts' expectations, will grow in the future, but the P/S multiple is now at a historical low” - Oleh Kombaiev
Kombaiev believes a combination of technical factors suggesting the company is oversold, and fundamental factors indicating the company is undervalued, add up to a “great combination for a long-term purchase.”
Alibaba itself expects to keep on growing, saying that for the year ending March 2022 revenue will rise 30% to come in at over RMB930bn. While higher than expectations, that does mark a slowdown from the previous year’s 41% growth.
Outside of China, Alibaba is looking to South Africa and Vietnam to continue its growth story. In South Africa, it is working with Vodacom Group [VOD.ZA] to develop a “super app” that will allow users to access a range of services including online shopping and financial services. Alibaba is also investing heavily in Vietnamese conglomerate Masan’s retail arm as it wagers consumer online spending online will grow in the country.
Hitting Kombaiev’s $400 would represent an 88.9% upside on Alibaba’s share price at 26 May’s close.
Not everyone is as bullish when it comes to Alibaba’s share price, however. After Alibaba said it would plough profits back into the business in its most recent earnings, analysts began trimming their price targets, sending the share price down.
Baird, for example, trimmed its price target on Alibaba in May from $285 to $270, but maintained its outperform rating. Hitting Baird’s revised target would still see a 28% upside on Tuesday’s close, while a $267.66 average price target from analysts tracking the stock on Yahoo Finance would see a 26% upside.
The China investment theme
Scrutiny from Beijing has hurt Alibaba’s share price, but that’s also true of the China Tech investment theme as a whole. Over the past month, the investment theme is down 5.30%, according to our thematic investment screener.
That said, it has gained 4.04% over the past week (to 26 May’s close), and some will hope that China’s tech leaders and the ruling communist party will start seeing eye-to-eye.
David Balin, CitiGroup Wealth’s chief investment officer, reckons that the hammering Alibaba and other China Tech stocks have been receiving recently makes them bargains. The executive told CNBC’s “SquawkBox Asia” that the firm plans to be adding them to portfolios.
“The risk is clear, the regulatory risk, but also these are companies that the Chinese government does not intend to damage, rather they intend to regulate, and there’s a far distance between the two” - David Balin, CitiGroup Wealth’s chief investment officer
“We really like them and I think we’ll be adding to them over the next month or two,” Balin told SquawkBox.
While regulatory issues have been a concern, Balin argues that Beijing isn’t out to destroy these companies, but regulate them.
“The risk is clear, the regulatory risk, but also these are companies that the Chinese government does not intend to damage, rather they intend to regulate, and there’s a far distance between the two,” added Balin.