Why Alibaba Stock Could Be Ready to Rally

Shares of Chinese e-commerce giant Alibaba  (BABA) – Get Alibaba Group Holding Ltd. Report soared 36% on March 16 after financial authorities reported they were working on a cooperative plan with U.S. regulators. The goal of the plan is to prevent Alibaba and other China-based companies from delisting from U.S. exchanges.

Up until now, regulatory hurdles were the main obstacles keeping investors away from Chinese companies. With its delisting threat removed, is Alibaba’s stock ready to rally?

Figure 1: Why Alibaba Stock Could Be Ready to Rally

Alibaba Group

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Why Is China Easing Its Regulatory Crackdown?

The news that Chinese government officials are rethinking their strict regulatory policies for companies listed on U.S. exchanges handed Chinese stocks their best trading day in 14 years. The iShares MSCI China ETF  (MCHI) – Get iShares MSCI China ETF Report, one of the main indexes tracking Chinese companies, rose more than 20% on Wednesday, and stocks like Alibaba and Nio  (NIO) – Get NIO Inc. (China) Report closed the day up over 36% and 25%, respectively.

By working on a cooperative plan with their U.S. counterparts, Chinese regulators can reinforce the stability of Chinese stocks, as well as prevent China from being considered uninvestable.

But at the same time, China is reporting its largest outbreaks of COVID since the beginning of the pandemic. Thanks to the country’s zero-COVID policy, that’s causing many cities to go into lockdown. That could have a really bad impact on the global economy — and especially China’s GDP.

Economists now expect China’s GDP to take a considerable hit during Q1. So it might not be a coincidence that Chinese authorities have decided to ease regulatory pressures at this moment. After all, it wouldn’t be ideal to jeopardize the flow of foreign capital.

Alibaba’s Fundamentals Remain Robust

Alibaba has had to deal with tough comps over the past year due to weaker e-commerce sales in 2021 than in 2020. However, Alibaba’s business remains robust.

The company has an aggressive growth plan for the next few years and has nearly half-a-trillion dollars to allocate mainly to its emerging segments such as cloud computing and storage, as well as digital media and entertainment.

Also, when looking at Alibaba stock, the company trades at a rather modest valuation multiple compared to its peers. Obviously, this is the result of the massive sell-off we saw in 2021. Alibaba’s market cap has lost over $500 billion since October 2020.

Alibaba currently trades at a price-to-earnings (P/E) ratio of 12.2 times. That’s significantly lower than its rivals. Amazon  (AMZN) – Get Amazon.com, Inc. Report currently trades at a P/E of 47 times, and JD.com  (JD) – Get JD.com Inc. Report trades at 38 times.

Is Alibaba Ready to Rally?

Regulatory concerns and tough comps have been driving the narrative for Alibaba’s stock. But despite all of the bearishness that Chinese stocks have faced, the Wall Street consensus has continued to be bullish on BABA. That’s based on the fact that the stock’s decline was due mostly to factors beyond the company’s control and not based on its robust fundamentals.

And in the short term, Alibaba may even benefit from China’s new lockdowns. With its core audience staying at home, we could see a repeat of the e-commerce trends of 2020.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)

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