The rout among growth stocks has been brutal over the past few months. Indeed, the Nasdaq index has dropped over 23% in the past year and 30% over the past year. I own several US growth stocks in my portfolio, meaning that this fall has been devastating for my portfolio. However, I invest for the long term, and I believe that this dip has led to many opportunities to buy. Alibaba (NYSE: BABA) is one stock that looks far too cheap at its current price.
The decline of Alibaba
In October 2020, Alibaba had a market capitalisation of $800bn, and many believed that it would be the next company to reach the $1trn valuation mark. However, from this point, everything started to go downhill.
For one, China started to crack down on tech giants, handing out extremely large fines for anti-competitive behaviour. For example, in the quarter ending 31 March 2021, it was announced that Alibaba had been given a $2.8bn fine under the anti-monopoly act. This was the largest fine ever handed out by the Chinese government. It also represented around 4% of the company’s domestic annual sales.
Recently, the group has also seen slowing growth, partly due to the macroeconomic environment. This includes large inflationary pressures, which may reduce consumer spending on discretionary goods. As such, alongside other growth stocks, Alibaba has dipped to a market cap of ‘only’ $300bn. Over the past year, it has fallen 50%.
What are the positives?
Despite these recent fears, I can still see a large amount of long-term potential with Alibaba. For example, despite the macroeconomic uncertainties, revenue climbed 9% year on year. Although this is far slower growth than previously, it is still encouraging to see some sort of growth.
Further, China has recently signalled an easing of its tech crackdown, after Chinese officials met with some of the country’s top technology executives. Chinese Vice-Premier Liu He also signalled that these companies would receive more support from the government. Some investors have argued that this may indicate the start of a bull market for Chinese tech stocks.
Finally, I feel that the group’s international operations could drive future growth for the company. For example, in 2018, Alibaba acquired Daraz, which has expanded Alibaba’s reach into Pakistan, Bangladesh, Sri Lanka, and Nepal. The company also owns Lazada, which operates in south-east Asia, and Trendyol in Turkey. The CEO of Alibaba, Daniel Zhang, believes that these international businesses have “huge potential”. This is a very encouraging sign.
What’s next for this growth stock?
There are many challenges facing Alibaba, yet I remain confident about the company’s long-term prospects. Revenue in the Asian e-commerce market is expected to reach over $2.6trn in 2025, up from around $2trn this year. Alibaba also trades at a price-to-earnings ratio of around 14. This is very low for a growth stock. Therefore, this is a company I would be very willing to buy and hold for the next five years.