What happened
Shares of Alibaba (BABA +1.72%) stock bounced back from yesterday's tech sell-off, gaining 6.5% through 1:25 p.m. ET Tuesday as stock market analysts debated whether the company's just-announced turnaround plan will work or not.
Image source: Getty Images.
So what
Hong Kong-based investment bank CLSA led off with the bull argument, calling Alibaba stock "cheap" at its recent price under $123 a share. CLSA predicts that as Chinese consumer spending grows, as Alibaba expands further into international markets, and as Alibaba's own technology improves, these three "strategic engines" will propel the company's growth, reports TheFly.com.
Of these three "engines," CLSA places the greatest weight on Alibaba's technological prowess, saying the company "enjoys unparalleled competitive advantages and a strong technological lead," in particular in cloud-based computing, which will be "the next big growth pillar" for Alibaba stock.
In its bearish rebuttal, though, U.K. stock broker Atlantic Equities says it has little confidence that Alibaba's Taobao and Tmall subsidiaries will perform well in the near term. The analyst agrees that Alibaba stock looks "inexpensive" at 17.5 times earnings. Still, Atlantic worries that Alibaba's "aggressive" spending on improving the technology that so impresses CLSA won't necessarily pay off for Alibaba. And in particular, Atlantic sees the company's investments in "AliCloud" as being only a "modest" catalyst for the stock.
Now what
For today, it appears that investors are buying CLSA's argument over Atlantic Equities'.
Ultimately, though, this debate is going to come down to growth. Sure, 17.5 times earnings looks like a value price for Alibaba stock -- but only if the company can produce enough growth to justify the valuation. While it's true that Alibaba has exhibited some fine growth in the past (a 30% compound rate of growth in earnings over the last five years for example, according to S&P Global Market Intelligence data), over the next five years, most analysts don't see the company producing even 10% annual earnings growth -- but less than 9% instead.
If that's the best Alibaba ends up doing, I fear that today's rebound in stock price will be short-lived.
