Russ Cohen

Why Alibaba Stock is Worth a Second Look Despite Challenging Headwinds Why Alibaba Stock is Worth a Second Look Despite Challenging Headwinds

Alibaba (NYSE: BABA), had an impressive stock market debut with a record-breaking IPO in 2014. The company achieved a valuation of $169.4 billion and its stock soared to an all-time high of $312.87 in 2020. Fast forward to January 2024, and Alibaba’s stock closed just above its IPO price at $68.05, marking a steep decline from its peak.

As of the latest update, Alibaba’s stock has recovered to $74, but it remains significantly below its historical highs. What led to this significant downturn?

1. Revenue Growth is Stabilizing

In fiscal 2023, Alibaba’s revenue growth was stagnant, with only a 2% increase. The company’s core e-commerce and cloud businesses faced significant challenges. However, in the first six months of fiscal 2024, revenue climbed by 11% year over year. Analysts project a 9% full-year growth. A key contributor to this stabilization is the rapid expansion of Alibaba’s international digital-commerce business, encompassing platforms like Lazada, Trendyol, and AliExpress. This overseas growth has helped counterbalance declining growth in its Chinese marketplaces, Taobao and Tmall, facing fierce competition from rivals such as Pinduoduo and JD.com.

While Alibaba’s cloud business showed modest growth in the first half of fiscal 2024, there is potential for acceleration as the macro environment improves. Additionally, Alibaba’s smaller business units, including logistics, local services, and digital media, continue to experience double-digit growth. Analysts anticipate an 8% CAGR in Alibaba’s revenue from fiscal 2023 to 2026, signaling a slower but steady growth trajectory for the company.

2. The Stock is a Bargain

Alibaba’s cooling revenue growth prompted a strategic reduction in costs to bolster its margins. The company’s restructuring into six separate divisions, each led by different CEOs, positions it to raise capital through spin-offs and IPOs in the coming years. Alibaba’s operating margin expanded from 8.2% in fiscal 2022 to 11.6% in fiscal 2023, with analysts forecasting a rise to 15.1% in fiscal 2024. Furthermore, the company’s earnings per share (EPS) are expected to grow at a CAGR of 31% from fiscal 2023 to 2026. Despite these promising indicators, Alibaba’s stock is trading at just 10 times next year’s earnings, making it a compelling investment opportunity, provided it can overcome its current challenges.

See also  Exploring the Lucrative Opportunities in Mid-Tier Gold MiningThe Rise of Mid-Tier Gold Miners

As the current state of the gold market unfolds, mid-tier and junior miners have emerged as captivating prospects for investors seeking substantial returns. In the wake of the latest quarterly results, these smaller gold producers have showcased exceptional performance, underpinned by escalating production rates, reduced mining costs, and a buoyant gold price environment. The resultant profitability surge signals a promising future for mid-tier miners, poised to shed their undervalued status.

Decoding Gold-Stock Tiers

The realm of gold mining is stratified into distinct tiers based on annual production capacities, ranging from small juniors with modest outputs to huge super-majors operating on a colossal scale. The VanEck Junior Gold Miners ETF (NYSE:) stands out as a key player, predominantly housing mid-tier gold stocks despite its misleading nomenclature. The delineation between juniors and mid-tiers holds essential implications for investment strategies, with mid-tiers offering a blend of substantial production, growth potential, and market capitalization conducive to significant gains.

The Performance Paradox

The intrinsic leverage of gold stocks in relation to the underlying gold prices manifests as a double-edged sword for investors. Recent events have underscored this phenomenon, wherein the VanEck Junior Gold Miners ETF (NYSE:) exhibited a lackluster response to gold price fluctuations. While gold staged notable rallies, the ETF's performance lagged behind, failing to magnify the upswings in the precious metal market. This disconnect unveils the intricacies of investing in gold stocks, which demand superior performance to counterbalance inherent risks.

Unveiling Q4 Performances

Amidst the quarterly performance evaluations of the top 25 constituents of GDXJ, pivotal insights into mid-tier gold miners' operational and financial standings emerge. The analysis, chronicling production rates, cost dynamics, revenue streams, and earnings, showcases a remarkable Q4 showing characterized by production growth, cost efficiencies, and robust earnings. The synergy of these factors culminated in substantial profit escalations, cementing the appeal of mid-tiers and juniors in the gold mining sector.

Fueling Growth Through Production

Production escalation stands as the linchpin of success for gold miners, nurturing a virtuous cycle of growth by bolstering cash flows and profitability. The recent performance of the GDXJ-top-25 gold miners, heralding a seventh consecutive quarter of output growth, exemplifies this paradigm. With a collective production rise of 2.8% year-over-year in Q4'23, these mid-tiers outpaced their larger counterparts, signaling a robust trajectory of growth and resilience amidst market fluctuations.

Setting the Stage for Success

Amidst the shifting landscapes of gold mining, mid-tier miners like Equinox Gold (NYSE:) epitomize the industry's metamorphosis. Equipped with expansion plans to bolster their standing within the GDXJ ranks, these mid-tiers harness innovation and strategic acquisitions to propel growth and solidify their market presence. The narrative unfolding in the gold mining sector underscores the strategic allure of mid-tier and junior miners, poised to capitalize on the sector's burgeoning potential.

Insights into the Gold Mining Industry Exploring the Golden Opportunities in the Mining Sector

3. Insider Buys and Big Buybacks

Alibaba’s co-founders, Jack Ma and Joseph Tsai, recently invested $200 million in company shares, signaling their confidence in Alibaba’s future. Additionally, the company initiated a significant buyback, repurchasing $4.8 billion in shares during the first half of fiscal 2024.

Investors Need to Tune Out the Near-Term Noise

Although Alibaba appears undervalued at present, it could remain volatile amidst concerns over China’s economic growth and escalating U.S.-China tensions, impacting the valuations of Chinese stocks. However, investors with a long-term perspective could stand to gain substantial returns as Alibaba stabilizes its revenue, diversifies its business, boosts its operating margins, and continues its share buyback program.

Should you invest $1,000 in Alibaba Group right now?

Before making any investment decisions, it’s worth noting that the Motley Fool Stock Advisor analyst team recently identified what they believe are the 10 best stocks for investors to buy now, with Alibaba Group not included in their list. The service has a track record of outperforming the S&P 500 since 2002, providing investment guidance and regular updates from analysts.

*Stock Advisor returns as of January 22, 2024

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.