In the ever-evolving landscape of tech stocks, Alibaba (NYSE:BABA) has been one of my long-term favourites. Despite its recent tribulations, this Chinese e-commerce powerhouse continues to capture my attention. Many hesitate due to the geopolitical risks, but I still think this is one of the most underappreciated assets in the S&P 500.
Undervalued quality
Currently, Alibaba trades at a striking 52.1% below a discounted dash flow (DCF) estimate. With shares changing hands at about $75 and a market capitalisation of $174.6bn, I feel that the company is currently at a substantial discount to its intrinsic worth.
This valuation disconnect stems from a perfect storm of challenges: stringent regulatory measures in China, lingering effects of pandemic-related disruptions, and persistent geopolitical frictions. These factors have contributed to a 17.5% decline in Alibaba’s stock price over the past year, contrasting sharply with the broader US market’s 27% gain.
Steady growth
While the discounted price is certainly eye-catching, the firm’s appeal extends far beyond its current market valuation. Despite disappointing performance in the market, the company’s financial fundamentals remain robust, boasting trailing 12-month revenue of $129.41bn. Even in the face of recent profitability pressures, Alibaba managed to generate earnings of $10.96bn.
Looking ahead, the growth story appears far from over. Analyst projections point to an annual earnings growth rate of 13.76%, suggesting significant potential for future value creation.
A key pillar of Alibaba’s investment thesis is its rock-solid balance sheet. With a debt-to-equity ratio of just 15.3%, the company maintains exceptional financial flexibility. This conservative capital structure positions Alibaba well to navigate economic uncertainties and pursue growth opportunities without the burden of excessive leverage. It has enabled management to buy back over 613m shares of the company in the last three months alone.
A new strategy
In a notable development for income-oriented investors, Alibaba has recently embarked on a dividend program. The current yield of 1.3% may seem fairly modest. However, the conservative 23% pay out ratio leaves ample room for future dividend growth, potentially bringing in a new field of investors.
Of course, it’s crucial to approach any investment with a clear-eyed view of the risks involved here. These include the unpredictable nature of China’s regulatory environment, ongoing geopolitical tensions, and fierce competition in the domestic e-commerce arena. However, these risks are well understood by the market. By my reckoning, this is now fairly well baked into the share price, barring any further escalation.
A lot to like
I feel that Alibaba presents a really compelling opportunity for investors with a higher risk tolerance and a long-term perspective. By many calculations, it is trading well below its estimated fair value and offers promising growth prospects.
Key factors to monitor include Alibaba’s adaptation to the evolving regulatory landscape, its ability to capitalise on China’s expanding consumer base, and the growth of its AI systems, cloud computing, and other technology services. While the journey may be turbulent, the potential reward for steadfast investors in this giant of the S&P 500 could be considerable if Alibaba successfully navigates these hurdles and reignites its growth engine. I’ll be holding onto my shares for the long term.
The post My favourite S&P 500 stock is still potentially 52% undervalued appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
Investor Michael Burry has 10% of his portfolio in these 2 dirt-cheap value stocks
Gordon Best has positions in Alibaba Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
