2 Reasons to Be Bullish About Alibaba Stock

It's been frustrating for investors in Alibaba (NYSE: BABA) stock. After peaking in 2020 at $306, it has gone nowhere but down, trading at just $77 as of writing. Most investors have avoided the stock as the company undergoes multiple internal and external challenges, including competition, slower growth, and geopolitical tensions.

Still, investors with a longer horizon might want to focus not only on the downsides but also the opportunities. Let's focus today on the latter, pointing out two reasons to be optimistic about the company.

Its e-commerce business remains hugely dominant

Once hailed as the leader in Chinese technology companies, Alibaba fell from grace with the rise of younger e-commerce platforms like PDD Holdings and Douying.

PDD's low-price strategy has attracted Chinese consumers. It competes directly with Alibaba's e-commerce platform, which was traditionally the go-to site for price-conscious consumers. PDD leverages its huge short-video user base to offer livestreaming e-commerce services, an area where Alibaba was the incumbent.

The impact for these companies was real, which explains Alibaba's disappointing e-commerce revenue growth of just 5% in its 2024 fiscal year , ended March 31, 2024. By comparison, it delivered 42% growth in 2021.

Still, there are a few things that investors should note. First, Alibaba is still the leader in this industry, with a 46% market share in 2023. So despite all the competition, consumers are still voting with their wallets, doing much of their shopping on Alibaba. And for good reasons.

Alibaba is still by far the largest e-commerce platform when it comes to choices. Consumers can get almost anything, including physical goods and digital products. Its extensive merchandise selection also means that PDD, while it might offer the lowest prices on many products, is unlikely to do so on all products.

The company's new management has also acknowledged that it failed to put consumers first in the past, saying it focused first on its merchants. The company is now making adjustments to recapture shoppers. To this end, Alibaba is embracing a low-cost strategy and leveraging its logistics arm (Cainiao) and artificial intelligence to provide a better e-commerce experience to consumers.

Fortunately, Alibaba's hugely profitable e-commerce business provides all the firepower (and staying power) to invest in this strategy. For perspective, this segment generated 195 billion yuan ($27 billion) in earnings before interest tax and amortization in fiscal year 2024. Investors will need to be patient as the company executes its turnaround plan.

Investors are getting plenty of value for the stock

The tremendous pessimism around Alibaba's business means investors get massive value from buying the stock. To start, Alibaba's stock trades cheaply in terms of valuation metrics. Its price-to-sales (PS) and price-to-book (PB) ratios are 1.5 and 1.3. That's a considerable discount to its western peer Amazon , which trades at PS and PB ratios of 3.0 and 7.5.

But if we dig deeper, investors can find the stock offering even more value than these numbers suggest. For instance, the Chinese company has $85 billion in cash and cash equivalents, short-term investments, and other investments. It owns promising businesses like Alibaba Cloud, an overseas e-commerce business, and Cainiao, and it has stakes in promising ventures like Ant Group. All that for $184 billion in market capitalization!

The company also has repurchased plenty of shares ($12.2 billion in fiscal 2024) and has started paying dividends to shareholders. In other words, investors are getting paid while waiting for management to turn its business around and rekindle its growth.

What it all means for investors

As most successful companies have discovered, Alibaba's near-term challenges are unavoidable as it prepares for the next growth stage. And since not all restructuring and turnarounds work out well, investors have good reasons to be concerned about its future.

On the bright side, the company's e-commerce business is still hugely profitable, and it owns a few promising subsidiaries that could set it up for future development. Besides, the majority (if not all) of the negativity is already priced into the stock.

So, for those with strong a strong stomach and a willingness to invest for the long term, Alibaba looks like an attractive candidate.

Before you buy stock in Alibaba Group, consider this: