The market rally has stalled since the start of the year, but it could be just a breather before another advance. Following a once-in-a-decade market correction in 2022, the blue chip-heavy S&P 500 index surged nearly 19% last year.
There are still top stocks trading at low price-to-earnings ratios, which is a good sign that the market rally has legs. Here's why shares of Alibaba Group (BABA 0.27%) and PayPal Holdings (PYPL 1.61%) are due for their own rally in the new year.
Alibaba
If you're looking for a bargain among industry leaders that is profitable and has a wide customer reach, look no further than Alibaba. It's the leading e-commerce and cloud computing provider in China, but the stock is trading at a forward price-to-earnings (P/E) ratio of just 7.5, which is absurdly cheap.
NYSE: BABA
Key Data Points
Alibaba is entrenched in the daily lives of millions of customers and businesses, offering entertainment, retail stores, local services, and digital media, in addition to its core e-commerce marketplaces and cloud computing business. Alibaba generated $130 billion of revenue across all these businesses over the last year.
The stock is 79% off its peak from a few years ago. China's regulatory environment has been a factor, creating some uncertainty for investors, but the biggest problem impacting the stock's performance is a sluggish economy. Alibaba isn't growing nearly as fast as it was before the COVID-19 pandemic. This is a recipe for a falling share price, especially when Alibaba stock was priced for lots of growth.
The good news is that Alibaba has a new CEO who is focused on making improvements, including ways to better monetize its non-core businesses to unlock more value for shareholders.
Alibaba stock has tremendous upside from these share prices. The company ended the last quarter with $67 billion in equity securities and other investments. It's also raking in $30 billion in free cash flow, while the market value for the whole company is just $171 billion. That's a genuine bargain for one of the top e-commerce and cloud computing providers in the world.
Analysts expect Alibaba to grow earnings to $10.74 by fiscal 2026 (Alibaba's fiscal year ends in March). If the stock is trading at a P/E of 15 -- still a discount to the S&P 500 average P/E of about 25 -- the shares would trade for $161, representing potential upside of 138%. If you can hold shares for another six years, there's a good chance of even better returns.
PayPal
PayPal is a leading digital payments platform that is experiencing similar headwinds as Alibaba. The stock has collapsed over the headwinds in the economy that caused lower growth in PayPal's branded checkout volumes, but the market might be overlooking some key advantages that will see the company (and the stock) bounce back.
NASDAQ: PYPL
Key Data Points
Despite the recent headwinds, PayPal is no slouch of a competitor with 430 million active customers and merchant accounts. Its large merchant network and customer base casts a wide net to capture more spending in the $5 trillion e-commerce market.
PayPal processed $388 billion of payments in the third quarter alone. It's also showing there is a lot of growth still out there, considering its quarterly payment volume was up 15% over the same quarter in 2022. That's impressive for a company that has been around for more than 20 years.
PayPal is ultimately benefiting from consumers' reluctance to change. It's human nature to stick with something that is familiar, and this explains why PayPal continues to see customers are not only sticking with the platform but also increasingly using their accounts. After a slight dip in user activity in 2022, the number of transactions per account picked up last year, growing 9% year over year in 2023's third quarter.
Recent headwinds in retail spending won't stick around forever. PayPal's large customer base will allow it to capture a greater slice of trillions of online shopping and peer-to-peer payments over the long term.
Meanwhile, investors can invest in PayPal at an incredibly low forward P/E of 12. The Wall Street consensus earnings estimate calls for PayPal to reach $6.16 in earnings by 2025. If the stock's P/E is 15 in the next two years, the stock would trade for $92, representing 42% upside from the current share price.
When you extend the company's earnings out at a 15% annual rate, based on Wall Street's long-term forecast, the stock could double in value by 2030.
