The past three years have been tough for Alibaba (BABA 0.59%) and, by extension, its shareholders. While the stock of China's e-commerce and tech giant performed well during the early days of the COVID-19 pandemic, Beijing's regulatory crackdown on its various business segments, paired with lingering economic malaise, took a sizable toll.
Most economists aren't particularly optimistic about China's foreseeable future either and most of Alibaba's revenue comes from China. That's a big reason Alibaba shares remain down 75% from their late-2020 peak. The stock merely moved sideways since March of last year.
What if, however, China's economy is far healthier than the current narrative seems to suggest?
That's arguably the case right now, making Alibaba stock a much stronger buy than most investors realize.
Despite the rhetoric, China's seeing green shoots
Don't misunderstand: China's still dealing with challenges that adversely impact its consumerism and corporate spending. Take its real estate market as an example. The nation's home prices fell for a third straight month in September, according to its National Bureau of Statistics, despite efforts specifically aimed at propping home prices up.
The country's overall economic engine isn't exactly sputtering, though. Last quarter's GDP growth of 4.9% (year over year) topped estimates of 4.6%. That's slower than the second quarter's growth pace of 6.3%, but bear in mind that Q2's figure was compared to a number crimped by lingering COVID-19 lockdowns. On a quarter-to-quarter basis, the third quarter's economic growth of 1.3% actually accelerated from the second quarter's clip of 0.5%.
Meanwhile, other measures of economic strength are up just within the past month. China's industrial production jumped 4.5% year over year in September, and after July's disappointing retail spending growth of only 2.5%, the nation's consumers are spending in earnest again. Retail spending growth sped up to 4.6% in August and reached a growth rate of 5.5% last month.
More of the same progress could be in the cards too. Although Beijing was arguably slow to act when it first saw evidence of economic weakness, it's doubling down on stimulus efforts now. Last week, the country's central bank pumped a record-breaking $100 billion into its economy, following a similarly big injection last Monday. Although this stimulus is meant to support real estate loans, its impact should create a ripple effect that reaches other slivers of China's economy.
Given all these indicators, is it still a wait-and-see situation on Alibaba stock? Well, there's nothing wrong with respecting risk. Investors who wait until all risk has withered away, though, likely end up missing out on the bulk of a stock's upside potential.
Alibaba is lined up for takeoff
Interested investors should understand that Alibaba is positioned to disproportionately benefit from China's brewing economic rebound. Rekindled retail spending creates a tailwind for Alibaba's online malls Taobao and Tmall. E-commerce accounts for roughly half of Alibaba's total revenue, after all.
It's not just growing consumerism working in Alibaba's favor, though. China's consumers are increasingly embracing online shopping anyway, even at the expense of brick-and-mortar spending. Thanks to the proliferation of broadband and wireless service there, Insider Intelligence estimates China's e-commerce market itself is on pace to expand 9.3% this year, jibing with numbers from market research outfit Global Data. Insider Intelligence further expects the country's online shopping industry's revenue to continue growing at this year's pace at least through 2027.
And Alibaba is already winning more than its fair share of this expansion. Despite the spending headwind that was supposed to be blowing at the time, Taobao and Tmall's Q2 revenue was up an impressive 12% year over year following the first quarter's pronounced headwind. Imagine how well this arm of the company could do in an even better economic environment.
The rest of Alibaba's business consists of logistics, cloud computing, digital entertainment, a handful of different types of tech services, and a budding artificial intelligence endeavor. These are all enterprises that struggle when the economic environment is poor. Indeed, not all of them are even profitable at this time. These are all business lines, however, that thrive when China's economy is firing on all cylinders.
Also, note that Alibaba is making a point of capitalizing on opportunities as they surface. Case(s) in point: After TikTok recently shut down commercial accounts marketing to Indonesian consumers, Alibaba invited these displaced merchants an easy way to open an online store on an Allibaba.com. The company also recently made a deal with Cambodia's Ministry of Commerce to help the country's small businesses build their own online stores.
In the meantime, Alibaba is building an online mall aimed specifically at a European audience, working with its local merchants and vendors rather than competing against them.
Don't overthink Alibaba
Still, what about Alibaba stock's miserable performance?
It weighs on the mind to be sure. This is one of those cases, however, where the pessimism and noise took on a life of its own, obscuring a company's results and prospects. Alibaba is growing its top and bottom lines, and it is expected to continue doing so. China's economy is on the mend, even if pundits seem almost gleeful when pointing out its pitfalls. Trade tensions between the United States and China are heightened right now, but they'll likely be curbed for one simple reason: The two countries need each other.
These are bigger-picture factors working in favor of Alibaba, even if they don't seem to be helping much right now. It just takes time for investments to pay off because it takes time for the market to remember what really matters.
That being said, you may not want to wait too long to step into Alibaba stock if that's your ultimate plan. As the old adage goes, "It's always darkest before dawn." Given how grim things seem for the company right now, a rebound may be closer than anyone realizes.
This might help: Despite the stock's lousy performance of late, analysts' consensus price target stands at $140.84. That's 76% above the stock's present price.
