China has been a tough sell in the past year. Its stock markets tanked as investors shunned the nation’s high-flying technology shares in 2018. But that situation is reversing quickly this year, and Chinese stocks have just finished their best first two months of the year since the global financial crisis.
Among the beaten down tech stocks, Alibaba (NYSE:BABA), China’s e-commerce giant, has surged 35% so far in 2019, while next-largest competitor JD.Com (NASDAQ:JD) has accelerated almost 38% in the same period.
The rebound follows a painful year that saw Alibaba losing a quarter and JD.com shedding almost half its value after China’s economy hit a slow patch and the prospects of a devastating trade war with the U.S. sapped investor confidence.
Recent developments on the macro front show that investors' pessimism on the world’s second-largest economy has gone too far. The U.S. and China are reportedly getting closer to a trade deal that could be finalized as early as this month, according to the Wall Street Journal.
On the domestic side, China announced a set of measures yesterday to boost economic growth, including new tax cuts and financial incentives for businesses, and lending a helping hand to small and private companies.
Alibaba Shows Strong Earnings Growth
But the big question for long-term investors is whether this is another bubble being created purely on optimism, or whether it’s the right time to get serious again about the nation’s stocks.
In our view, a safer bet to play China trade in this uncertain environment is to stick with the solid names, and avoid smaller players which have yet to show a sustained path to growth. For that reason, we like Alibaba, the Chinese equivalent of Amazon.com (NASDAQ:AMZN), more than any other tech stocks.
Alibaba, whose Taobao and Tmall marketplaces connect merchants with Chinese consumers, showed in its Jan. 30 Q3 report that its earnings momentum remains on track despite the past year’s economic slowdown and uncertainties.
Revenue from Alibaba’s core commerce platform jumped 40% in the third-quarter when compared to the same period a year ago. Its cloud-computing segment brought in sales that were 84% higher, and its innovation initiatives expanded 73% during this period, signaling success in the company’s efforts to diversify its business.
The past quarter was the tenth straight period when Alibaba delivered better revenue growth than JD.com, allowing the company to keep competition in check. Going forward, Alibaba has a much better chance to grow and diversify. The company has invested heavily to expand in the cloud-computing business by opening new data centers in Europe, the Middle East, South Asia, Southeast Asia and in the domestic Chinese market.
China’s latest economic measures to boost domestic growth is another reason that makes us more bullish about Alibaba. China plans to boost spending by 2 trillion yuan, or 2% of its $13 trillion economy and give 30% more loans to small businesses. This all bodes well for retail stocks and Alibaba is well positioned to benefit if these measures boost consumer spending.
After rallying more than 30%, Alibaba shares have recovered much of their losses of the past year. The gains largely reflect hopes for a possible trade deal between U.S. and China. That may or may not happen soon, but Alibaba is one stock you should consider if you're seeking exposure to the largest consumer market in the world.
Bottom Line
The majority of analysts on Wall Street have a buy rating on Alibaba, with an average $205 price target, implying about 10% further upside from yesterday’s close of $185. That shows only modest upside in the short run. But if your investing horizon is long-term, buying Alibaba is still worth it, given the company’s dominant market position and its ability to benefit from Chinese growth acceleration plans.