1 Growth Stock Down 63% to Buy Right Now

Alibaba (GRANDMA -6.67%) it is often considered a benchmark of China’s economy. It owns the country’s largest e-commerce marketplaces and a leading cloud platform, as well as brick-and-mortar stores, a logistics business and digital media services.

Alibaba has been a high-growth stock over the past decade. From fiscal 2014 to 2024 (which ended in March), its revenue expanded at a compound annual growth rate (CAGR) of 33% as adjusted net income grew at a CAGR of 19%. The stock rose from an initial public offering (IPO) price of $68 per American depositary share (ADS) on September 18, 2014, to an all-time high of $306.16 on October 27, 2020.

Image source: Getty Images.

But today, Alibaba shares are trading at around $113, down more than 60% of their value as they face tough macro, competitive and regulatory challenges. Those headwinds haven’t fully dissipated, but I think it’s poised to come back for four simple reasons.

1. He overcomes his biggest challenges

Alibaba suffered a major setback in 2021 after China’s antitrust regulators fined it a record $2.75 billion and banned its e-commerce business from locking its merchants into exclusive deals using aggressive promotions that lead to losses and make unapproved investments and purchases. These restrictions made it easier for smaller competitors such as PDD and JD.com to catch up

As Alibaba grapples with these regulatory and competition challenges, China’s macro environment has deteriorated as the pandemic has disrupted multiple industries and the government has stymied its own recovery with draconian “zero-Covid” lockdowns. These headwinds further stunted the growth of its e-commerce and cloud businesses.

However, Alibaba has now fully moved past these regulatory failures. China has also recently launched new stimulus measures to stabilize its economy. Alibaba will therefore continue to face competitive pressures in China, but its core businesses should heat up again as regulatory and macro headwinds gradually dissipate.

2. Its growth accelerates and stabilizes

Alibaba’s growth slowed in fiscal 2022 and 2023 as it grappled with those macro, competitive and regulatory challenges. But in fiscal 2024, revenue and adjusted net income growth accelerated again.

Data source: Alibaba. FY = fiscal year.

This growth was driven by faster growth in its overseas e-commerce marketplaces (including Lazada in Southeast Asia, Trendyol in Turkey and AliExpress for cross-border sales), which offset the slower growth of Taobao and Tmall in China .

Alibaba’s Cainiao logistics unit also evolved into a new growth engine as it outsourced more of its services to third-party customers. Its cloud infrastructure business, which suffered a slowdown as macroeconomic headwinds led many of its customers to rein in their software spending, also stabilized in the second half of the year.

From fiscal 2024 to 2027, analysts expect Alibaba’s revenue and net income to grow at a CAGR of 8% and 21%, respectively. It certainly won’t grow as fast as it has in the past decade, but it should continue to grow as it remains the 800-pound gorilla of China’s e-commerce and cloud markets for the foreseeable future.

3. It still makes a lot of money

Alibaba’s top-line growth is cooling, but it’s returning plenty of cash to its investors. It bought back $12.5 billion in shares in fiscal 2024 and approved its first annual cash dividend of $1 per ADS earlier this year. It also paid a one-off special dividend of $0.66 per ADS in June. Alibaba’s forward yield of 1.8% may not yet appeal to serious income investors, but its low payout ratio of 51% should give it plenty of room for future dividend increases.

4. It looks ridiculously cheap relative to its growth potential

Last but not least, Alibaba shares look very cheap at 15 times next year’s earnings. If China’s aggressive stimulus measures restart its economy, e-commerce and cloud businesses should eventually expand and boost their valuations.

Alibaba has been in the penalty box for the past four years, but it’s finally worth buying again. Its shares may remain volatile as investors assess China’s latest stimulus plans, but should head higher as its biggest challenges fade.