Alibaba Stock: The Top Discount Play for Savvy Investors

Wall Street authorities like Michael Burry and Ray Dalio have invested heavily in Chinese stocks. Many believe that everyone should have at least a little exposure to this accelerating growth nation, whose middle class is the fastest growing in the world. However, fear is now the driver for Chinese stocks, as most are uncomfortable investing in overseas names.

Unfortunately, unemployment soared past 4.3% in the United States, and inflation is signaling a recession for businesses, according to the PPI report this week. Other indicators pointed to a weakening state for the S&P 500. Considering that the stock market still trades at cyclical high multiples and the “Buffett Indicator” is also high, the risk-to-reward profile doesn’t look as attractive as in emerging markets.

Today, shares of Alibaba Group (NYSE: BABA) stock are rallying close to 3% after the company announced its second quarter 2024 earnings results. Alibaba's recent performance isn't the only highlight—there's more positive news around both the company and China overall. Before exploring the significant tailwinds propelling Alibaba to the forefront of value investments, let’s review this Chinese blue-chip company's quarterly performance.

Alibaba Stock: All Drivers Running Hot This Quarter

Contrary to popular belief, China's economy is not that cold at the moment. Inflation has been positive every month of 2024, which is a good signal of the state of the consumer market. Consumer discretionary stocks like Alibaba are the first to benefit from these trends.

This is why overall revenue rose by 4% over the past 12 months. However, what should matter to investors is how this revenue increase was achieved. Alibaba's largest segment is its China commerce wholesale business, and that space saw more growth than most investors expected.

A 16% jump over the year is far from a sign of a slowing economy, especially considering this is wholesale within China. Even as bullish as this growth rate is, international markets saw even better numbers. Retail commerce business for international markets saw a 38% growth rate over the year, while wholesale reported 12% growth.

Moving to Alibaba's technology aspects, its cloud business saw 6% revenue growth over the year. The international digital commerce group, another mix of commerce and technology for Alibaba, grew by 32% over the year, and investors now have a new partnership in Brazil to look forward to for further growth.

Gross merchandise value (GMV) grew by double digits over the year, placing Alibaba above its closest competitor, Amazon.com Inc. (NASDAQ: AMZN). However, this isn't all bullish news for Alibaba; there is one downside.

Free cash flow (operating cash flow minus capital expenditures) contracted by 56% during the year, which could be enough of a warning sign to send the stock lower; however, the nature of the contraction had just the opposite effect.

These investments went right into the company's cloud business, which is a high-margin space that will return a high return on these investments. Knowing that growth could be ahead for the stock, Wall Street analysts now forecast 11.4% earnings per share (EPS) growth in Alibaba for the next 12 months, well above China's inflation and GDP growth projections.

However, these analysts weren't the only ones willing to show optimism for Alibaba's future.

Alibaba Stock Outlook: More Upside Ahead?

Since 2023, Ray Dalio, founder and manager of the world’s largest hedge fund, has been increasing his investments in Chinese stocks. While not picking individual stocks this time, he did choose the iShares MSCI China ETF (NASDAQ: MCHI), whose top five holdings include Alibaba, so he must have found it beneficial after taking this weight into consideration.

A bolder call was made (again) by Michael Burry, as his 13-F filing now shows he boosted his stake in Alibaba stock directly by up to 24% over the past quarter. He is also overweight in China, as his other top holdings include Baidu Inc. (NASDAQ: BIDU) and JD.com Inc. (NASDAQ: JD).

Those at Jefferies Financial Group now see a price target for Alibaba stock of up to $116 a share, daring it to rally by as much as 43% from where it trades today. More than that, Alibaba’s management itself had enough conviction over the company’s value to buy back its own stock, as up to $5.8 billion was allocated toward Alibaba’s stock buyback program.

Other funds reporting an increase in Alibaba positions included Primecap Management, which raised its position by 5.2% as of August 2024, bringing the asset manager’s net investment up to $1.6 billion today.

The article "Alibaba Stock: The Top Discount Play for Savvy Investors" first appeared on MarketBeat.