- Alibaba stock rallied more than 8% on Tuesday on news that the company had bought 33 million shares of Groupon.
- Alibaba stock is down nearly 20% YTD, which means there is still time to buy Alibaba stock before it rallies on.
- Alibaba has an exciting growth story as it seeks to cut its exposure to the Chinese economy by widening its wing-span.
Alibaba (NYSE:BABA) stock rallied more than 8% on Tuesday morning after news emerged that the company had bought nearly 33 million shares of Groupon (NASDAQ:GRPN), an equivalent of 5.6% holding in the U.S. company. On the other hand, Groupon rallied nearly 47% in the early trading hours. Alibaba has been buying shares of Groupon over the last few months and now investors are beginning to speculate on what the intentions of the Chinese e-commerce giant could be.
An article published by Forbes contributor Doug Young points to the possibility that Alibaba may be planning to acquire Groupon in the near future, and that it could be only a matter of time before the company makes the announcement. Acquiring Groupon would be strategic for Alibaba as it seeks to boost its international presence.
Gaining significant access to the U.S. market will no doubt be one of Alibaba’s biggest challenges to its global expansion plan, but if it can seal partnerships with companies like Groupon, then things might be a lot easier. Groupon has had its struggles since going public, but still, its business model is one of the best. If it can get access to the kind of cash Alibaba has on its balance sheet, then it could easily provide the e-commerce giant with the perfect avenue to gain traction in the U.S. market.
Despite Tuesday’s rally and strong earnings, Alibaba stock still remains nearly 20% down YTD. This is still a perfect time for investors to buy the stock because, given the recent events in the global stock market, there may never be a better time on the near term horizon.
The stock market rebound or just another sucker rally?
Since the turn of the year, stocks have plunged globally, and even the companies that boast stability and promise for growth like Alibaba have not been spared. However, on Tuesday, China’s Shanghai Composite rallied 3% while Hong Kong’s Hang Seng Index was up 1.35% thereby triggering what could be a possible rebound in Asian stocks.
In addition, Russia, Qatar, Venezuela and Saudi Arabia agreed to freeze oil production at January levels further boosting the price of oil. Low energy prices have been part of the reason why stocks have plunged globally this year and the news of production freeze from four of the leading oil producers would have excited global markets from an investing perspective.
While Iran, which re-entered the market after sanctions were lifted recently, remains opposed to the decision taken by the four oil producers, investors appear to be convinced that the decision will do a lot of good to energy prices. Since the start of the year, the price of Crude oil has been very volatile after falling to about $26 per barrel and rallying back to about $31.00 within six weeks while its counterpart Brent traded between $28 per barrel and $37 within the same period.
However, the agreement to freeze production is seen by investors as a good step towards stabilizing the price of oil thereby boosting confidence in the stock market. This will no doubt boost the prices of good stocks like Alibaba.
Will Alibaba stock move with the market?
As pointed out at the beginning, Alibaba is one of the best stocks when analyzing it from a fundamental perspective. The company’s revenue is growing at a rate of 26.4% YOY, which is in tandem with its push for a global presence. While most of its revenues still originate from China, the company’s business model is tailor-made for global growth.
Alibaba is not a typical e-commerce company where buyers and sellers come to buy/sell single products. It is rather a marketplace, which connects buyers and sellers, with a particular focus on retailers. It is more of a B2B company rather than a B2C platform. This gives it a better chance of widening its addressable market.
The company has an operating cash flow of $8.75 billion for the trailing 12-month whiles its total cash of $18 billion compares to a debt of $8.6 billion. The company enjoys massive profitability margins and this explains why it’s generating cash flows good enough to service the current debt without any hitches.
Alibaba also enjoys an attractive ROE of 34.68% while its forward P/E of 2.93 for March 31, 2017, is supportive of the company’s growth story. In addition, its PEG ratio of just 0.87 compares positively to the industry average of about 1.39x.
Alibaba stock is trading at a price to earnings ratio of 15.95x compared to the industry average for internet commerce companies of 42.3x. Its price to book ratio of 4.55 is also impressive when compared to the industry average of about 8.2x.
Based on these valuation metrics alongside the company’s key fundamentals and its business model, Alibaba’s 2016 failings in terms of the stock price can only be linked to the global market plunge. Therefore, as the market rebounds, investors should expect a similar move in Alibaba stock if not better.
The bottom line is that Alibaba is one of the best eCommerce companies in the market. There is no doubt that its massive exposure to the Chinese economy poses a significant risk, but then again, this internet commerce giant seems to have put plans in place to counter that weakness by expanding globally.
Its investment in Groupon may yet signal its intentions of bidding for the U.S. company in the near future, but there is nothing concrete as of yet. Nonetheless, even at just 20% down YTD, now may be the right time to buy Alibaba stock.