Are you looking for an underrated stock that could make for a good contrarian bet in the next year? Two stocks you should consider taking a chance on today are American Well (AMWL -1.62%) and Alibaba Group Holdings (BABA 2.92%).
Although both stocks have had disastrous performances in 2021, I don't expect that pattern to continue over the long term -- and a rally could happen next year. Investors aren't overly bullish on telehealth or Chinese stocks right now, but overlooking those segments and these stocks could be a mistake.
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1. American Well
This year has been nothing short of disastrous for telehealth company American Well, also known as Amwell. While the S&P 500 has climbed 24% since the start of the year, Amwell stock has crashed more than 73%. Telehealth simply hasn't been a popular place to invest these days as investors become more skeptical of how popular the service will truly be.
But the reality is that telehealth has a place in the future as a low-cost healthcare option. Companies offering healthcare plans that focus on telehealth, for example, could keep costs down that way. A study from 2017 found that the average cost per telehealth visit was $79 compared to $146 for an in-person visit to the doctor's office.
That's why even if lockdowns aren't a concern, telehealth isn't going to just disappear; analysts from Facts & Factors project the global telehealth market will grow at a compound annual rate of 26.5% to 2026, when it will be worth more than $475 billion.
Amwell has had a tough go of it over the past 12 months, incurring losses of $179 million on sales of $240 million. And the number of telehealth visits has been slowing down. For the period ended Sept. 30, Amwell's total visits of 1.4 million were only slightly higher than the 1.3 million it recorded a quarter earlier -- and that was down from 1.6 million in the first three months of the year.
The company is also far behind its key rival Teladoc Health, which reported 3.9 million visits over the latest quarter -- and that, on top of general bearishness in the sector, doesn't help. Teladoc itself isn't doing great this year with its shares down more than 46%.
What complicates things is that Amwell is transitioning its business so that it provides technology solutions for other companies via its Converge platform and becomes less dependent on telehealth visits. It's risky for investors, and there's no telling how successful it will be. But it's a move that I think can pay off over the long run.
Its Converge platform allows for various telehealth apps to be available in just one place, making it easy for patients to access an array of services. The company says that according to a survey, "77 percent of hospital and health system leaders want to move toward a single, secure, and fully integrated virtual care platform." Amwell could help meet that need through Converge.
The value of telehealth in a post-pandemic world may begin to resonate with investors next year as inflation puts more pressure on keeping costs down, and as a result, the digital service starts to become a more attractive option. And more bullishness on telehealth will be key in turning Amwell's stock from a loser this year into a winner in 2022.
2. Alibaba
China-based tech giant Alibaba has also had a rough year in the markets, declining more than 40% in 2021. Chinese stocks generally haven't been doing all that well amid concern about government crackdowns and poor U.S.-China relations. One top tech company, Baidu, has fallen more than 30% this year, and tutoring company TAL Education has fallen by a mammoth 92%. To say it hasn't been a pretty year for Chinese stocks is a gross understatement.
Recently, U.S. President Joe Biden met (virtually) with Chinese President Xi Jinping in an effort to improve relations between the two countries. Although no firm progress was made in the meeting, it was a positive step nonetheless.
And if those relations can improve next year, that can have a positive effect on Alibaba and other similar Chinese stocks that have been struggling over the past 12 months. Tariffs and threats of delisting Chinese companies from major U.S. exchanges are just some examples of why investors have been a bit cautious about investing in Chinese stocks in recent years.
But that doesn't mean Alibaba hasn't been to blame at all for its misfortunes this year. In November, the company released its quarterly results for the period ended Sept. 30, which fell short of analyst expectations on revenue and earnings. The company also reduced its guidance and now expects sales growth to be no higher than 23% for the 2022 fiscal year (compared to nearly 30% previously).
The dimmer outlook could be due to the slowing growth in China. In the first quarter of 2021, the Chinese economy was off to a hot start with its gross domestic product rising at a rate of more than 18%. In the second quarter, that fell to 7.9%, and then to 4.9% in the most recent three-month period ended in September.
Part of that can be blamed on COVID-19 as the delta variant has been causing case numbers to rise in China. However, when a country has nearly 20% growth in one quarter, it's likely that those percentages will taper off as it would be too optimistic to expect that to continue.
Regardless of your outlook for China in the near term, Alibaba is still a fairly safe tech stock to invest in -- and a big part of that is how diverse its business is. Its commerce-related segments grew by 31% year over year to $26.6 billion in its most recent quarterly results. And the company's cloud computing segment, which accounts for 10% of revenue, rose at an even higher rate of 33%, reporting revenue of $3.1 billion.
The company also generates sales from digital media and "innovation initiatives." Earlier this year, Alibaba invested $300 million into autonomous driving company DeepRoute.ai.
Alibaba trades at a forward price-to-earnings multiple of just 16 vs. 27 for U.S.-based tech company Alphabet. With a broad business that looks incredibly cheap, Alibaba is an underrated growth stock heading into 2022.
