The coronavirus from China has dominated the headlines so far this year as Beijing struggles to get a handle on its spread. The wider market has largely written it off, but Chinese stocks have seen investor sentiment drop. While it’s true that the coronavirus is likely to dent China’s economy and create challenges for its businesses, there are a handful of contrarian plays that make great buy-the-dip-candidates now. Alibaba (NYSE:BABA) stock is one such contrarian play that will likely pay off in the long term.
Notably, when the firm released its earnings on Feb. 13, CEO Daniel Zhang admitted that the coronavirus presented a challenge. Zhang said the virus would, “present near-term challenges to the development of Alibaba’s business across the board.”
Alibaba CFO Maggie Wu noted that, “The means of production in the economy has been hampered by the delayed opening of offices, factories and stores.” Because of that, Wu said revenue growth would struggle in the current quarter.
There’s no doubt that the current quarter is likely to be a rough one for Alibaba its Chinese peers. But the impact, at least for Alibaba, looks likely to be short term.
Alibaba Stock Is a Buy
Mark Schild, an assistant dean at Seaton Hall University’s Stillman School of Business, told InvestorPlace in an email that he believes the e-commerce segment is likely to feel the smallest impact from the coronavirus outbreak.
“As with all companies, especially Asian companies, the Coronavirus must be paid attention to, as there is little question that parts of the economy may slow down,” Schild wrote. “However, retail/online shopping will most likely not be the first area to be hurt, just the opposite as fears of virus may keep people out of malls and on the computer.”
Schild says now that Alibaba has released its earnings report without any surprises, “the general momentum of the markets should continue to benefit BABA shareholders.”
Susquehanna Investment Group’s Shyam Patil took a similar tone, saying that the firm’s long-term growth story remains intact. He called Alibaba a “China e-commerce category killer with a large secular growth opportunity ahead.”
Patil gave Alibaba stock a $260 price target. That represents 20% upside from where it’s trading today.
Indeed, Alibaba’s third-quarter results — before the virus — were impressive. Sales were up nearly 40% from the previous year and the nation’s “Singles’ Day” saw record sales. On top of that, both revenue and earnings per share topped analyst estimates.
On top of that, Alibaba’s cloud business showed promise as revenue rose more than 60%. So far, Alibaba’s cloud business has been confined to China, but the company says it’s planning to make its way overseas soon. If Alibaba’s cloud arm continues with this kind of momentum, it will likely become profitable sooner than expected. Those profits would boost the firm’s bottom line substantially.
Alibaba Is on Sale Now
The bottom line for Alibaba stock is, if you liked it before, then you should really like it now. Alibaba shares are trading at just 3 times the firm’s forecast earnings. That’s well below the S&P 500 average go 19.5.
While the past four years have seen Alibaba’s share price more than triple, the firm still has further to fly. Morningstar noted that despite Alibaba’s exponential rise, the business still has a long growth runway. As of September 2019, the firm had 693 million active buyers. That’s roughly half of the nation’s entire population — that means there’s plenty of room for the firm to continue expanding its e-commerce market in the years to come.
Plus, Alibaba’s impressive collection of customer data makes it one of the most desirable marketplaces. Morningstar’s R.J. Hottovy noted that Alibaba’s transition to a data-centric conglomerate has opened up a host of possibilities for future growth.
“We’ve long thought that a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than Alibaba.”
The Future of Alibaba
Over the next few months, investors should expect turbulence among Chinese stocks. However, I believe investors have digested the impact of coronavirus on the e-commerce giant and are unlikely to punish the stock next quarter. Even if they do, that makes for another great entry point for long-term investors. Alibaba looks like a great long-term bet, coronavirus or not.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.