Please ensure Javascript is enabled for purposes of website accessibility

Here's My Top Value Stock to Buy Right Now

By Will Ebiefung - May 19, 2021 at 7:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Alibaba offers excellent bang for your buck, despite the regulatory uncertainty.

Everyone wants more for less, and stock market investors are no exception. As they research potential value stocks to add to their portfolio, they might want to take a look at Chinese tech giant Alibaba (BABA -0.10%).

Alibaba is a great way to bet on the red-hot e-commerce industry for just a fraction of the valuation of the company's rivals. And while Alibaba faces some regulatory uncertainty over alleged anti-competitive practices, its diversified business model and healthy growth rate make up for these challenges.

A red-hot industry 

Valued at $2.1 trillion, China's e-commerce market is the biggest in the world. And it is expected to grow at a compound annual growth rate (CAGR) of 12.4% and hit $3 trillion in value by 2024. Alibaba is a great way to bet on this opportunity because of its dominant market share of around 50% in business-to-consumer (B2C) e-commerce. That's compared to JD.com (JD 0.19%) and Pinduoduo's B2C shares of 27% and 13%, respectively.  

Cash in a shopping cart

Image source: Getty Images.

Alibaba's e-commerce subsidiaries Taobao (which focuses on consumer-to-consumer sales) and Tmall (which focuses on B2C) use third-party business models. Instead of buying inventory and retailing products to consumers, they operate marketplaces that host and advertise other businesses' online sales for a fee. This strategy helps save operational costs, and it gives Alibaba dramatically higher margins than its closest rival, JD.com, which uses a first-party business model.

In 2020, Alibaba reported an operating profit margin of 13%, which is significantly larger than JD.com's operating margin of just 1.7% over the same period. 

But Alibaba isn't limiting itself to e-commerce. The company also aims to transform brick-and-mortar shopping through a concept known as "New Retail," which involves digitizing in-person shopping experiences.

Alibaba has implemented this strategy through its Freshippo food store chain, which offers cutting-edge features such as digital price tags, robotic product transport and robotic waiters. The company has also spent $3.6 billion to acquire a controlling stake in hypermarket retailer Sun Art to help boost its physical footprint.

But what about the regulators?

With such a massive market share, Alibaba has drawn the attention of Chinese antitrust regulators, who fined it $2.8 billion for allegedly restricting competition and infringing on its merchants' businesses. The company enforced a "choose one" requirement that prohibited some clients from working with other e-commerce platforms. Management has accepted the fine, and it said it plans to ensure compliance going forward.

It is unclear if compliance will have a long-term impact on Alibaba's operating results (at just 12% of 2020 net income, the fine itself likely won't). But considering Alibaba's strong growth rate and dirt-cheap valuation, any potential weakness looks priced in. 

Fourth-quarter revenue surged 64% year over year to 187.4 billion yuan ($28.6 billion), while adjusted EBITDA increased 18% to 29.9 billion yuan. The company's revenue streams are also diversified, with cloud computing representing 8% of revenue and a potential source of future earnings growth. Alibaba Cloud's revenue grew 37% to 16.8 billion yuan in the fourth quarter. The business is also getting closer to consistent profitability, with adjusted EBITA increasing from a loss of 179 million yuan last year to a gain of 308 million yuan in Q4. 

An unbeatable valuation 

With a forward price-to-earnings (P/E) multiple of just 16, Alibaba is significantly cheaper than the S&P 500 average of 44. It is also an excellent value compared to U.S. e-commerce giants such as Amazon, which trades for 45 times expected earnings, or Shopify -- valued at an eyewatering forward P/E of 217. Regulatory uncertainty is a likely explanation for Alibaba's discount. But with that overhang priced in, investors have an opportunity to bet on a growth stock trading at value stock prices

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Amazon, JD.com, and Shopify. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$94.77 (-0.10%) $0.10
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$57.05 (0.19%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.