E-commerce has been a huge growth industry, evidenced by its solid performance over the last two decades, and that trend could continue for years, if not decades. An increase in global internet penetration, demand for better shopping experiences, and the growth of social commerce are some of the significant tailwinds that will sustain the development of this industry.
To benefit from this ongoing trend, investors can bet on leading e-commerce companies that are well-positioned to perform in the foreseeable future. Let's explore one company with good prospects and is also trading at an attractive valuation: Alibaba (BABA 1.25%).
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Alibaba's stock is cheap
Investors in Alibaba have had a tough time over the last few after the stock fell by more than 70% from its peak of $317 per share. A series of issues, such as the calling off of Ant Group's initial public offering, the Chinese government's crackdown on major tech companies, and slower growth, have contributed to the share price decline.
While bad for existing investors, Alibaba's declining stock price means new investors can acquire the stock at multi-year low valuation levels. To put that into perspective, Alibaba's price-to-sales (P/S) ratio stands at 1.8, just a fraction of its five-year average of 5.3. By comparison, Chinese rival Pinduoduo's P/S ratio is 6.6.
While some investors' concerns will likely persist -- such as the risk of intervention from the Chinese government -- other issues like slower growth should be a temporary problem. For instance, Alibaba reported that revenue grew by 14% year-over-year in the quarter ended June 30, the best performance since the September 2021 quarter. Its e-commerce business also delivered a solid performance in the latest quarter with a 12% increase in revenue, suggesting that the worst could be over.
In other words, a cheap valuation is just one aspect of Alibaba's story. The other part is that despite all the pessimism around the stock, the company is capable of doing well over the long run.
Investors should not rule out Alibaba yet
There are good reasons to like Alibaba now, and the most obvious is its dominant market position in the Chinese e-commerce business. It still owns the lion's share of that market (49% as of 2022), even though smaller peers like Pinduoduo and Douying have recently expanded their positions. Given the size of the Chinese e-commerce market, multiple platforms should be able to coexist to serve the needs of consumers.
Alibaba's dominant position should help it benefit from the macro tailwinds, such as the increase in e-commerce penetration and the growth in per-capita wealth. For perspective, China has an estimated e-commerce penetration of around 30%, and its GDP per capita is less than $13,000 (versus about $76,000 in the U.S.). The increase in e-commerce penetration and a growth in per-capita GDP should naturally lead to an expansion of the online retail market, benefiting top players like Alibaba.
The conglomerate is also on a strategic path to break its empire into six business units, allowing each one to chart its own course (including going public). On one level, the restructuring could bring back the entrepreneurial spirit that the giant needs to return to its historical growth trajectory. Moreover, Alibaba owns other smaller but up-and-coming businesses, such as Cainiao Logistics and Alibaba Cloud. As these companies go public, they will get a proper market valuations, which could benefit Alibaba's valuation.
So why should investors bother?
In short, it's too early to give up on Alibaba. Alibaba has had a tough time over the last two years amid the above-mentioned issues.
Yet investors' pessimism has rendered the stock too cheap to ignore, especially as some of these issues are temporary. Besides, Alibaba still owns some of China's best businesses, and has the potential to grow its e-commerce and other younger ventures in the coming years.
I think Alibaba's stock presents an opportunity to own a high-quality business at a low valuation, one that investors should not miss out on.
