It's been a tough past few years for Alibaba Group Holding (BABA -3.20%), and, by extension, for shareholders. The stock's down 76% from its late 2020 peak, unable to hold into the gains driven during and because of the COVID-19 pandemic. It's still dwindling, too, now back within sight of the multi-year low made in late 2022. Investors just see too many lingering red flags.
As veteran investors know, though, you own stocks based on the underlying company's plausible future rather than its past. Might there be a chance Alibaba's finally about to shrug off what's holding it back?
Rhetoric over results
You mostly likely know the company as China's e-commerce powerhouse, but that's not all it is. Alibaba also operates a cloud computing business, manages a logistics arm, owns a handful of digital entertainment properties, and is even tinkering with artificial intelligence and autonomous-vehicle tech.
E-commerce is by far its single-biggest profit center, though, accounting for roughly two-thirds of revenue and practically all of its net income. If it's going to thrive or struggle, it's going to happen on that front.
And to its credit, the company has been thriving on that front of late. Its online shopping platforms Tmall and Taobao collectively produced 4% worth of year-over-year revenue growth during the first quarter of the year, extending last year's comparable growth. Its related divisions like logistics/delivery and international commerce support produced strong, double-digit growth in the first quarter as well, also extending 2023's pace of progress.
The only real weak spot since last year, in fact, is its Sun Art hypermarket arm. Everything else is making respectable -- even if not riveting -- progress, benefiting from China's ongoing economic recovery and subsequent rebound in consumer spending.
BABA Revenue (Quarterly) data by YCharts
So why then is Alibaba stock stuck in a rut even though Wall Street clearly believes it's worth so much more than its present price? Mostly because the majority of investors are having trouble believing China -- and Alibaba in particular -- are truly on the mend. This is where investors must accept that picking stocks is sometimes more of an art and less of a quantitatively driven science, and act accordingly.
A deeper dive into the details
To be fair, much of this stock's continued lethargy has been inflicted by the underlying company itself. Alibaba's been through a couple of significant management change-ups just since September of last year, for instance, leaving investors wondering if more such disruption is in the cards.
It has also planned spinoffs of its cloud computing arm as well as its logistics arms in recent months only to change its mind before actually doing so with either. The company is now optimistic about both businesses, but the indecision further crimps confidence in Alibaba.
The narrative regarding China's economy isn't helping, either. You've likely heard much about its crumbling real estate market. The nation's industrial activity and consumer spending have also fallen short of expectations a few times this year.
Take a step back and look at the bigger picture, however. Disappointing or not, the data still looks pretty compelling on an absolute basis. Consider retail sales as an example. This measure of China's consumers' health was only up 2% year over year for June, down from May's improvement of 3.7% and shy of economists' estimates of 3.3% growth. But it was the 18th consecutive month China has seen some degree of growth in retail spending.
China's industrial output growth also slowed in June. At 5.3%, however, it's still quite strong. This measure of economic activity has also remained positive every month since April 2022. The country's second-quarter GDP growth rolled in at a solid pace of 4.7% as well, even if economists were expecting a figure of 5.1% following Q1's pace of 5.3%.
And even if investors don't believe it, analysts say Alibaba is poised to capitalize on this progress. They're still modeling revenue growth on the order of 8% this year as well as next, with earnings projected to improve at an even faster clip beginning next year.
Not fully reflected in these expectations are the company's artificial intelligence ambitions, which include tools that help third-party sellers handle cross-border business.
Yes, Alibaba stock is a buy
There's the rub, of course. The backdrop is bullish; yet, Alibaba stock just isn't moving, weighed down by the baggage of nearly four years' worth of poor performance and plenty of pessimism. Right or wrong, it's obviously enough to be a problem for would-be buyers.
As Benjamin Graham so accurately put it, though, "In the short run, the market is a voting machine but in the long run, it is a weighing machine." In other words, in the short run investors "vote" on a stock's price in a manner that reflects their momentary feelings. In the long run, however, a stock eventually reflects that underlying company's performance.
Right now, Alibaba stock is being seen as (at best) a hold based on investors' pessimistic perceptions. Yet the truth can't hide forever. This company's actually doing pretty well, and so is China and its neighboring economies. Alibaba's stock is arguably a buy for risk-tolerant growth investors.
This might help: As it stands right now, analysts' consensus price target is more than 40% above the stock's present price.
