Alibaba stock is starting to rally

The Alibaba-Aktien (WKN: A117ME) is starting to recover again. On Thursday, the stock temporarily rose more than 8% to over €100 (as of August 25, 2022). One of the triggers for this was a press report that the US and China were close to an agreement in the dispute over balance sheet audits of Chinese companies.

Since Alibaba’s balance sheets are controlled by Chinese companies and US authorities do not have access to the documents, Alibaba risks losing access to US stock markets. This has been one of the main factors weighing on the share price in recent months.

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At peak times in October 2020, the stock cost over €270. At the low point this spring, the price briefly fell to 66 euros. Since then, the stock has hovered around 100 euros.

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

Alibaba has a lot of potential

In particular, the favorable valuation makes the stock extremely interesting. 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 end up with a net profit of US$21.5 billion. That’s earnings of $8.31 per share. So at the current share price, you can get the stock for 12 times last year’s earnings.

But even more important are the possibilities that Alibaba brings with it. While growth has slowed in recent quarters, this is likely to be a temporary phenomenon, reflecting a slowdown in the Chinese economy. Once the economy picks up again, business at Alibaba will take off again.

Another advantage is that Alibaba is not based on a single line of business. The group has a whole range of business areas that are developing strongly, but some 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.

Equity markets increase upside potential

Since Alibaba has been very profitable for years and has only low capital requirements, the group can convince with an extremely stable balance sheet. At the end of June, Alibaba had nearly $70 billion in cash and short-term investments on its balance sheet. In addition, there is almost another $70 billion in investments in other companies. With its cash reserves alone, Alibaba could buy almost every DAX company!

In fact, cash reserves and investments currently represent about half of the company’s market capitalization. So, in theory, Alibaba could easily buy half of its stock. And every quarter more billions flow into the coffers.

Although this is unlikely to happen. But Alibaba actually returns a large portion of its profits to shareholders. Last fiscal year, it bought back $9.6 billion of its own stock. In the last quarter alone, more shares were bought for more than US$3.5 billion. This is great news for long-term investors. Because the share of the company and the profits represented by a single share gradually increase.

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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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