Follow Charlie Munger’s Lead and Invest in Alibaba Stock

This year, Alibaba (NYSE:BABA) stock is off to a flyer, rising over 10% in value in the first couple of weeks of trading. The gains have a lot to do with investing legend Charlie Munger doubling his stake in the company. After a forgettable 2021, this is just what BABA stock needed to kickstart a reversal of fortunes.

Last year turned out to be one of the worst trading years for Alibaba in recent memory. It spent most of January in an uptrend before things went south by early February. At the conclusion of 2021, the stock had shed over 40% of its value and had cost its investors over $300 million in market capitalization.

For BABA stock to show long-term strength, its underlying business must start firing again. It has had a couple of quarters of muted performance, but is likely to return to winning ways soon. Hence, with it trading at just two times forward sales, now is probably the best time to load up on BABA stock.

Recent Earnings Misses

In the past three quarters, Alibaba has fallen short of its consensus earnings estimates. Its second quarter for fiscal 2022 missed estimates on both lines. Its earnings per share (EPS) of $1.74 came in 19 cents lower than analyst estimates. This is despite a healthy 29% jump in total revenues during the quarter.

Nevertheless, during the second quarter, its core Chinese eCommerce business revenues surged by 30% from the prior-year period. Moreover, international and cloud revenues grew by 34% and 33%, respectively, on a year-over-year basis. Consequently, there is robust growth in Alibaba’s businesses at this time. Additionally, increased lockdowns are likely to drive more online traffic.

However, in the upcoming quarters, Alibaba will have to deal with higher tax rates. It is no longer a key software enterprise (KSE), with a massive jump from 10% to 20%. The consensus estimate for the third quarter is $2.48 in adjusted EPS, which is 3.8% lower than the same quarter last year.

Chinese November retail sales were unimpressive and with the increased investments in its subsidiaries, things are looking tough for Alibaba in the upcoming quarter. However, by March, things are likely to change for the company. Due to easy comps, Alibaba will probably beat analyst estimates and reverse course.

The Strength of Alibaba’s Services

Alibaba has amassed monopoly status in the Chinese online retail market. It has an incredible 953 million annual active consumers in the domestic market. Moreover, it has also been expanding overseas and boasts over 285 million international consumers. The company’s combined customer count totals up to 1.25 billion and it will continue experiencing growth for the foreseeable future. Though the local market has become somewhat saturated, its average consumer buying volumes will continue driving revenues higher in the coming years.

Furthermore, cloud revenues represent another bright spot for the company. Revenues rose 33% for the segment in the past quarter and outpaced its eCommerce business growth. Moreover, Alibaba cloud now possesses over 38% of the Chinese cloud market. Though it isn’t profitable on a generally accepted accounting principles (GAAP) basis, it has turned profitable on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis in the past four quarters. Hence, the business has gradually improved and reduced its dependence on its slowing eCommerce business.

Bottom Line on BABA Stock

BABA stock had a torrid time at the stock market in 2021, but seems to be moving in the right direction since the beginning of this year.

It will take a couple of quarters to generate market-beating earnings results, which is likely to have a strong effect on BABA stock. It operates a robust business that still has plenty of upside potential. Hence, BABA stock is an attractive bet at this stage.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.