Shares of Chinese e-commerce giant Alibaba Group (BABA 3.87%) jumped in Monday trading to close the day up 3.9%. This was kind of a strange reaction to news that, this morning, analysts at Loop Capital lowered their price target on the stock from $115 to $111 per share.
But here’s a bit of information that might help to explain the stock’s price move for you: Loop still thinks Alibaba stock is a buy.
What Loop Capital said about Alibaba
Loop made its Alibaba comments in the context of what The Fly called “a broader research note on China Internet.” Overall, the bank noted that China is suffering from “weak” consumer confidence and “soft” hiring that are making growth “challenging” — even for internet stocks that are supposed to be in perpetual growth mode.
And yet China remains the world’s biggest market for internet services of the kind Alibaba supplies. Despite all the headwinds Alibaba (and others) are facing, Loop can’t help but think that investors are assigning “overly punitive” valuations to Chinese internet stocks, and that these valuations are just bound to rise again if given enough time.
Is Alibaba stock a buy?
Personally, I’m no huge fan of China’s government — and I’m downright paranoid about the effects of recent government regulations on Chinese stocks. That being said, Loop is actually probably right about this. While Alibaba may not be growing as fast as it once was, consensus forecasts have the company still growing earnings at greater than 12% annually over the next five years.
For a company that’s selling for barely 10x trailing earnings — and paying a tidy 1.4% dividend yield — that makes for a very attractive valuation. The valuation looks even better when you realize that Alibaba has nearly $80 million in cash on its balance sheet (against less than $28 billion in debt), such that nearly $0.30 out of every $1 of the company’s market capitalization is already backed up by net cash.
When you consider further that Alibaba is generating $24.5 billion in positive free cash flow — enough cash to grow its bank account by nearly 50% by the end of this year — it’s hard to argue that Alibaba stock’s valuation is anything but “cheap.”
The bottom line: Twist my arm, and I might be convinced to buy this particular Chinese stock.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
