The past few months have been very tough for Chinese equities, with the Chinese government's crackdown on Big Data rattling international investors. The most shocking event in terms of straight damage to shareholder value was the government's ban on for-profit tutoring, which led to shares of New Oriental Education (EDU) and TAL Education Group (NYSE:TAL) nosediving by more than 90% off their past highs.
The Chinese government's wipeout begun with relatively small fines, such as those inflicted on Alibaba (NYSE:BABA). As the government has proceeded to eliminate an entire business model, who cannot understand investors dumping their Chinese stocks en masse?
Not only is the ongoing crackdown showing no signs of a slowdown, but a scenario in which the Chinese government continues to move in towards a "total control" policy, as recently discussed by Dan David, Founder & CIO at Wolfpack Research, seems more likely by the day.
However, in my view, as much pressure as such policies can have on specific industries, China's tech behemoths such Alibaba should be able to weather the storm. The company's operations are well-diversified. Further, it plays a key role in the Chinese economy (implying less incentive for the government to disturb their actions).
More importantly, Alibaba makes a ton of money, as proven by its most recent results. For these reasons, I am bullish on the stock. (See Alibaba stock charts on TipRanks)
A Money-Making Machine
As much as investors would like to focus on the risks attached, it is simultaneously hard to ignore Alibaba's snowballing financials. The company's most recent Q2 2022 results clearly demonstrated Alibaba's strength, despite the turbulent environment.
Revenues grew 34% to $31.8 billion, with Alibaba's worldwide Ecosystem reaching about 1.18 billion annual active consumers. This implies 45 million net user adds from the previous quarter.
EPS per ADS came in at $2.57, 12% higher year-over-year, powered by Alibaba's jaw-dropping net margins, which came in at 21.6%. This figure is quite impressive, because Alibaba even reinvests significantly back into the business to drive growth.
If the company were to reduce its investments, Alibaba's net margins could very reasonably surpass 30%. Even the most profitable American tech companies would be jealous of such margins.
The Stock is Undoubtedly Cheap
Based on Alibaba's FY2022 estimated EPS of $9.73, the stock is trading at a forward P/E of ~15.6. With analysts expecting a very reasonable EPS growth of 20% in the following year (which even implies a slowdown in terms of revenues), shares will be trading with a forward P/E of ~13.6, if the stock does not rebound.
Simply put, the stock's performance greatly mismatches Alibaba's growth and overall profitability. At some point, this mismatch will become so wide (if it hasn't already become so) that the stock will have to follow, eventually. Alibaba's management is also well aware of this, as evidenced by the boosting their stock repurchase program to $15 billion.
Wall Street’s Take
Turning to Wall Street, Alibaba has a Strong Buy consensus rating, based on the 23 Buys, one Hold, and one Sell assigned in the past three months. At $265.09, the average BABA price target implies 76.5% upside.
Disclosure: On the date of publication, Nikolaos Sismanis had a beneficial long position in the shares of Alibaba through stock ownership.
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