Alibaba Stock: A Good Long-Term Pick?

The Alibaba( NASDAQ:AMD ) stock has suffered badly in recent years. At peak times in October 2020, the stock cost over €270. Then the company came under regulatory scrutiny and the stock plummeted.

At its low point this spring, the share price was only 66 euros for a short time and therefore even less than immediately after the IPO eight years ago.

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Meanwhile, the price has recovered to €92, but is still miles away from the highs (as of July 29, 2022).

There are a few reasons that suggest the stock has a lot of potential over the long term.

Alibaba has a lot of potential

An important point is of course the still favorable valuation. From a business perspective, Alibaba is still doing very well. While growth has slowed, this is likely to be a temporary phenomenon, reflecting the slowdown in the Chinese economy. Once the economy picks up again, business at Alibaba will take off again.

Importantly, Alibaba continues to be highly profitable. In the year ended March, earnings were negatively impacted by depreciation and fluctuations in the valuation of certain investments. Even so, net income was $9.7 billion, or $3.59 per share.

If you subtract these non-cash effects from the result, you still have a net profit of US$21.5 billion. That’s earnings of $8.31 per share. At the current share price, you can own the stock for just over 11 times last year’s earnings.

Even if its core business falters in the future, Alibaba has many businesses that are growing strongly but are not yet profitable. Some of them are expected to break even for the first time this financial year. Cloud computing, in particular, should still offer a lot of potential and is already close to tipping the balance.

Stock buybacks increase upside potential

Another factor that will support the share price in the long run is its massive share buyback program. Alibaba has been buying back its own shares for more than a year, making smart use of the low share price.

In the last fiscal year, US$9.6 billion was already spent on it. In recent months, Alibaba has significantly accelerated its buyback program. From the beginning of April to the end of May alone, more shares were bought back for more than $3.4 billion.

Financially, this is not a big problem for Alibaba. The Chinese giant has bloated coffers. At the end of March, there was $70 billion in cash and short-term investments on the balance sheet. In addition, there is another $70 billion in investments in other companies. Thus, Alibaba has more than enough financial resources to retire a large portion of its shares.

In fact, cash reserves and investments currently account for nearly half of the company’s market capitalization. In theory, Alibaba could buy back almost half of the shares. And every quarter more billions flow into the coffers.

Of course, the capital could also be used for acquisitions. Either way, there is a good chance that earnings per share will increase sooner or later. And this will also raise the share price.

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Dennis Seipert owns shares in Alibaba. The Motley Fool does not own any of the stocks listed.

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