While the stock market enjoyed a banner year in 2023, Alibaba (NYSE:BABA) did not join the festivities. But the much-maligned stock could be poised for a rebound in 2024.
Over the past few years, it’s been a long, hard road for the Chinese mega-cap stock and its shareholders. Its underperformance continued somewhat of a trend; the former high-flyer has unfortunately lost 75% of its value from its peak in late 2020, falling from over $300 a share to just $73.01 today. This drop was even more troubling because it came at a time when tech stocks and the broader market indexes were racing higher.
However, Alibaba stock now looks like a deep-value play that can start rewarding 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 accelerate its return of capital to shareholders, and the huge upside forecast from Wall Street analysts.
How cheap is Alibaba Stock?
After the steep decline in share price, Alibaba trades for just 8.4 times earnings. It’s hard to overstate how cheap this is. Chinese stocks are generally cheaper than their US peers, but Alibaba is significantly cheaper than the typical US or Chinese stocks.
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 is also cheaper than the Chinese market as a whole. The iShares MSCI China ETF (NASDAQ:MCHI) average price-to-earnings multiple is 11.7.
To be fair, some of Alibaba’s selling over the past few years is understandable. Growth slowed, and shares took major hits when the company scrapped plans to spin off Ant Financial in 2020 and its cloud business in November.
But at this point, the selloff seems overdone, and these disappointments are likely baked into the stock price. Perhaps the best illustration of this is the striking fact that the share price is now back to where it was following its 2014 IPO, although its revenue is now five times higher and its income is 10 times higher than it was then.
In 2020, Alibaba’s market cap exceeded $800 billion. Today, it is under $200 billion.
In an environment where many other tech stocks have reached frothy valuations, making it difficult to find bargains in the tech sector, Alibaba’s battered valuation looks attractive.
Besides, it’s not like the company isn’t working to change things. It hired a new CEO last summer, and co-founder Joseph Tsai took over as chairman. The massive conglomerate was also restructured into six separate business units. Each of these units now has its own management team and Board, which should increase accountability and autonomy.
Brand New 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% won’t set income investors’ hearts racing, it’s a positive move by the company and shows it’s focused on rewarding its shareholders. There is also the possibility that this dividend payment may 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 buybacks. The company bought back a massive $9.5 billion of its own stock in 2023. Alibaba is still authorized for an additional $11.7 billion in share buybacks under its current share buyback plan, so more buybacks seem likely going forward.
Share buybacks can benefit shareholders because they reduce the number of shares outstanding and can be an indicator that management believes its shares are undervalued.
Is BABA Stock a Buy, According to Analysts?
Turning to Wall Street, BABA earns a consensus rating of Strong Buy 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, CLSA’s Elinor Leung’s top price target of $158 implies more than a double from here. Even Morgan Stanley’s lowest price target of $90 (NYSE: MS) Gary Yu is significantly higher than the stock’s current price, suggesting that the stock may have surrendered at this point.
Analysts Aren’t the Only Ones Who Like Alibaba
Wall Street analysts are collectively optimistic about Alibaba, and they’re not 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 higher is equivalent to an Outperform rating. Alibaba boasts an Outperform equivalent Smart Score of 8.
Looking Ahead
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 was ugly, but this is where the best opportunities often abound.
The tech mega-cap is trading at a paltry valuation at a time when many of its tech sectors have ballooned to nosebleed valuations. It’s a bargain compared to these tech stocks and the broader U.S. and Chinese markets as a whole, and it gives investors exposure to the same profitable long-term themes that other tech stocks are praised for, including artificial intelligence, cloud computing and e . – trade
In addition, the company recently initiated a dividend and returned excess capital to its shareholders through share buybacks. Ultimately, Wall Street analysts believe the stock has significant upside potential, and the Smart Score system also predicts it will outperform the market, meaning Alibaba could be a surprise winner in 2024.
Disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.