E-commerce juggernaut Alibaba (BABA) posted extremely strong earnings this past quarter.
Investors may read headlines such as “Alibaba Posted its First Operating Loss as a Public Company,” and immediately look to hit the sell button. That is less than an ideal way to view the company's loss right now.
Yes, BABA stock dropped precipitously on its earnings report, and yes, downside momentum is not in the favor of investors in BABA stock.
However, Alibaba has been beaten down to a level that simply doesn’t make sense. Investors ought to give this growth stock a good hard look right now.
Incredible Earnings Highlight Alibaba’s Strong Investment Thesis
Alibaba’s recent earnings report highlighted the opportunity available to investors at an incredible discount today.
The Chinese e-commerce giant posted revenue that beat analyst expectations by a significant margin. Alibaba’s 187.4 billion RMB ($28.6 billion) revenue greatly surpassed expectations of 180.4 billion RMB. This represented a revenue growth rate of 64% year-over-year.
The bar the market set for revenue growth was high, and Alibaba pole-vaulted over this target with ease.
On the bottom line, Alibaba’s performance was indeed hindered by a massive $2.8 billion (18.2 RMB) fine for abusing its market position. The company’s net loss of 5.5 billion RMB was significantly lower than Wall Street estimates of a 6.95 billion RMB profit. However, the fine aside, Alibaba more than beat on its top and bottom line.
The fact that this fine wasn’t factored into analyst expectations led to what many view as an oversight. The fine shouldn’t have come as a surprise to the market. However, since it was issued less than a month prior to Alibaba’s earnings report, analysts may not have had the time to adjust their models and target prices accordingly.
Technicals and Fundamentals Point to Serious Value
From a technical standpoint, it’s hard to view the recent selling in BABA stock as anything other than a buying opportunity.
Indeed, this stock is now trading near the bottom of its 5-year Bollinger band range. In other words, this stock is trading near two standard deviations away from its long-term moving average. As many investors who believe in the fundamental laws of finance know, this indicates BABA stock is in some seriously oversold territory.
From a fundamental standpoint, Alibaba’s recent earnings only highlighted the growth thesis underpinning this stock. The company grew earnings at a 64% year-over-year clip. The company’s logistics business grew by 101%, its core commerce business grew by 72%, and its cloud computing division grew by 37% year-over-year.
Importantly, investors should note that Alibaba’s cloud computing segment has recently become profitable. For those considering a comparison of Alibaba to U.S. players like Amazon (AMZN), this is a good sign. Amazon’s AWS segment has become a profit-generating machine for the company. Such an outlook for Alibaba makes this stock appear really cheap at these levels.
What Analysts Are Saying About BABA Stock
According to TipRanks’ analyst rating consensus, BABA stock comes in as a Strong Buy. Out of 26 analyst ratings, there are 25 Buy recommendations and 1 Hold recommendation.
As for price targets, the average analyst price target is $304.55. Analyst price targets range from a low of $270.00 per share to a high of $350.00 per share.
Bottom Line
There are few growth stocks investors can pick up at a forward price-to-earnings ratio of around 20 today. Given a forward revenue growth estimate of 30% for Alibaba, as per its recent earnings release, this is a stock trading well below a PEG of 1.
Alibaba is perhaps the cheapest large-cap growth pick in the market today. Investors would certainly be remiss to ignore this opportunity today.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.