It would be easy to dismiss the ideas of stepping into a stake in China's e-commerce giant Alibaba Group(NYSE: BABA). The company has underperformed for several quarters now. So has its stock. Blame China's economy, mostly, which hasn't seemed able to shrug off the lingering impact of the COVID-19 pandemic. Its real estate market is in something of a crisis as well. Never mind the unknown results of President Donald Trump's threatened trade tariffs.
What if, however, the narrative was all wrong ... or at least misleading?
This is arguably the case. While the bulk of Alibaba's customers are admittedly feeling the pinch of economic challenges, these are nothing their Western counterparts aren't experiencing and pushing past as well. Alibaba stock's weakness since early October -- and really since late 2020 -- reflects more worry than is merited.
A tailwind is blowing even if few see it
You're almost certainly familiar with the company. Alibaba is of course parent to China's online shopping platforms Taobao and Tmall, which collectively drove revenue of a little over $14 billion during the three-month stretch ending in September. Adding its other businesses like cloud computing, international e-commerce, logistics, and a handful of other related services to the mix, the organization reported a top line of nearly $34 billion for the quarter in question. That was up 5% year over year, extending the prior quarter's comparable growth and underscoring the traction its turnaround effort is getting.
Shares haven't exactly responded though ... at least not permanently. Alibaba stock's present price is 26% below October's peak. Indeed, shares are now more than 70% under their October 2020 high driven by then-soaring pandemic-prompted demand for online shopping options. Investors clearly fear Alibaba's future is nowhere near as compelling as its past has been.
However, this pessimism looks right past a handful of important, bullish realities regarding Alibaba's core businesses.
Despite the country's (and now the region's) current economic challenges, China's consumers are spending. The nation's retail sales rose 3.7% year over year last month, topping expectations as well as extending -- and even reaccelerating -- a growth streak that's now been in place for 24 consecutive months.
The country's other economic barometers are showing unexpected strength as well. Although still not quite as firm as hoped, industrial production improved 6.2% last month versus expectations of only a repeat of November's 5.4% growth. These monthly numbers cap off what's estimated to be quarterly gross domestic product (GDP) growth of 5.4% versus the third quarter's pace of only 4.6%.
It looks like China's economic stimulus measures are finally kicking in.
Much to like about the new-and-improved Alibaba
That's not to suggest Alibaba is simply going to get up off the mat and start boxing again. It took a rather significant shake-up to jolt the company back onto its feet, and the dust its fall made is still settling.
As an example, following several quarters of subpar performance compared to rivals like Temu parent PDD(NASDAQ: PDD) and JD.com(NASDAQ: JD), in late 2023 20-year company veteran (and co-founder) Trudy Dai was replaced as head of the company's e-commerce arm by Alibaba Group CEO Eddie Wu, shocking some observers. The echoes of this unexpected change may still be ringing within the corporate offices' walls.
Alibaba's also been rethinking ... well, everything else too. In March of last year, it canceled the planned spin-off of its Cainiao logistics unit, indicating it was a supportive business worth further developing rather than shedding. That move follows 2023's decision to also keep rather than sell its cloud-computing operation. Sticking with this business has allowed the company to venture into artificial intelligence (AI), which is an obvious growth opportunity; Precedence Research predicts the worldwide AI market is set to grow at an annualized pace of more than 21% through 2034. But it's also a crowded market, and Alibaba is late to the party with much work needed to catch up.
The top-down reshaping isn't apt to be completed either. Even if the economic backdrop turns decidedly bullish, Alibaba is still something of a work in progress. This could keep things uncertain for the foreseeable future.
Just don't miss out on an opportunity by waiting for perfection. A tailwind that favors this company is already blowing and is expected to continue blowing for the foreseeable future. That's China's GDP. Even with looming tariffs on its exports into the United States, economists expect China's GDP to grow on the order of 4.5% this year and remain healthy at more than 4% growth next year. As for e-commerce, Mordor Intelligence says China's e-commerce industry is set to expand at an average yearly pace of 10% through 2030.
Such expected progress certainly sets the stage for growth from Alibaba.
To this end, analysts expect its top line to improve by more than 6% this fiscal year en route to more than 8% growth next fiscal year. This outlook aligns with the operational changes the company's been able to finalize in just the past few months.
Other investors will see it sooner rather than later
So why is Alibaba stock struggling to get any bullish traction? Great question. It's probably got much to do with perception and assumption.
Most of the recent headlines about China's economy still lean in a bearish direction, highlighting the fact that the country's real estate market is on the defensive. Recent reporting also suggests that tariffs on Chinese-made goods will prove problematic for its economy. And maybe they will.
Just don't lose sight of what's actually happening in and around China. Its economy is moving on even without a meaningful contribution from the real estate market. It also exports to nations other than the U.S. Indeed, the World Bank says less than 20% of its exports are sent to the U.S. It can survive the intimated tariffs, particularly if the U.S. turns more isolationist.
Other investors should start to see this reality sooner or later (and likely sooner) working in this stock's favor.
And for what it's worth, analysts seem to see this reality already. The vast majority of them currently rate Alibaba stock as a strong buy, sporting a consensus price target in the ballpark of $120 per share. That's roughly 40% better than the stock's present price, which isn't a bad start for newcomers.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group and JD.com. The Motley Fool has a disclosure policy.
