China's e-commerce and cloud leader is a potential multibagger at these levels.
When Alibaba Group (BABA -0.94%) went public at $68 per share on Sept. 18, 2014, it raised $25 billion and became the largest initial public offering (IPO) in U.S. history. At the time, the bulls were impressed by the Chinese e-commerce and cloud leader's rapid growth rates.
On Oct. 27, 2020, Alibaba's stock reached its record high of $312.87. That was a near five-bagger gain for its initial investors, and many analysts were convinced its stock could go even higher over the next few years.
Image source: Alibaba.
But today, Alibaba's stock trades at about $81. Its growth cooled off as it faced tougher regulatory, macroeconomic, and competitive headwinds, and the bulls hastily retreated. Nevertheless, that sell-off might still represent a golden buying opportunity for long-term investors who can stomach all the near-term volatility. In fact, I believe Alibaba's stock could rise by at least 10 times over the next decade if it resolves its most pressing issues.
What are Alibaba's most pressing challenges?
Back in 2021, China's antitrust regulators hit Alibaba with a record $2.75 billion fine and barred its e-commerce business from locking in its merchants with exclusive deals, using aggressive loss-leading promotions, and making unapproved investments. Those restrictions eroded Alibaba's defenses against aggressive competitors like PDD Holdings and JD.com. China's economy also struggled to expand through the COVID-19 pandemic, and the government hobbled its own recovery with unpredictable "zero-COVID" lockdowns. Alibaba's cloud business also struggled as the macro headwinds drove companies to rein in their software spending.
That messy mix of regulatory, competitive, and macro headwinds caused Alibaba's growth to decelerate significantly in fiscal 2022 and fiscal 2023 (which ended last March). But in fiscal 2024, its top- and bottom-line growth accelerated again.
Metric | FY 2021 | FY 2022 | FY 2023 | FY 2024 |
|---|---|---|---|---|
Revenue growth | 41% | 19% | 2% | 8% |
Adjusted net income growth | 30% | (21%) | 4% | 11% |
Data source: Alibaba.
That acceleration was driven by the expansion of its overseas e-commerce marketplaces (including Lazada in Southeast Asia, Trendyol in Turkey, and AliExpress for cross-border sales) and its Cainiao logistics business. Its Chinese e-commerce and cloud businesses also stabilized in the second half of the year as the macro environment improved.
Furthermore, Alibaba generated so much cash it bought back $12.5 billion in shares in fiscal 2024 and approved its first annual cash dividend of $1 per American depositary receipt (ADR). At its current price, that dividend equals a forward yield of 1.3%.
Alibaba looks undervalued relative to its growth potential
From fiscal 2024 to fiscal 2026, analysts expect Alibaba's revenue to grow at a compound annual growth rate (CAGR) of 8% as its net income rises at a CAGR of 26%.
At 13 times forward earnings and 1 times next year's sales, Alibaba's stock looks undervalued relative to its growth rates. But that's because its valuations are being squeezed by the tensions between the U.S. and China, doubts about its new CEO Eddie Wu, and competitive concerns in the e-commerce and cloud markets. The recent cancellations of its cloud and logistics IPOs also suggest that Alibaba overestimated the market's interest in those two units as stand-alone businesses.
Why it has a viable path toward a 10-bagger gain
Yet Alibaba still has plenty of room to grow. According to Statista Market Insights, China's e-commerce market could expand at a CAGR of 10% from 2024 to 2029, while the cloud market could grow at a CAGR of 19% from 2024 to 2028.
If Alibaba stabilizes its Chinese e-commerce sales, expands its overseas e-commerce business, and stays ahead of its smaller competitors in the cloud market, it could grow its revenue at a CAGR of 10% over the next decade. If that happens, its revenue would rise from 941 billion yuan ($130 billion) in fiscal 2024 to 2.45 trillion yuan ($340 billion) in fiscal 2034.
It's also likely that Alibaba will continue to cut costs and buy back more shares to boost its profits. If its grows its bottom line at a CAGR of 20% from fiscal 2024 to fiscal 2034, its adjusted earnings per ADS would rise from 62.23 yuan ($8.62) to 385 yuan ($53.36).
If it's still trading at 13 times earnings by then, its stock price would rise to nearly $700. A slightly higher multiple of 16 would boost its stock price to more than $850 -- which would be more than a 10-bagger gain from its current price.
But investors should mind the long-term challenges
Alibaba has a viable path toward generating big gains over the next decade, but it needs to gradually widen its moat and leverage its scale to marginalize its smaller competitors without incurring the wrath of the antitrust authorities again. It would also benefit from friendlier trade relations between the U.S. and China.
I'm not saying that Alibaba's stock will definitely soar 10 times within the next 10 years. But I believe it's a compelling contrarian investment at its current valuations -- and it could head a lot higher if investors turn bullish on China's top stocks again.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
