One of the top non-U.S. stocks I’ve continued to follow over the years, Chinese cloud computing and e-commerce giant Alibaba (BABA) is certainly a company I’d consider a blue-chip tech name that hasn’t received the love it probably should have.
Given Alibaba’s size and importance to the global e-commerce and cloud industries, the company has remained a core position of many top money managers. Looking at recent 13-F filings, it’s clear that much of the smart money out there seeking value is increasingly looking at companies like Alibaba as providing the right mix of growth and value in this current backdrop.
Thus, it should be no surprise to many out there that growth investor Cathie Wood has stepped into Alibaba recently.
Let’s dive into this move, how much she bought, and what this may portend for investors looking at this Chinese tech giant right now.
This past week, Cathie Wood’s Ark Innovation ETF (ARKK) initiated a new position in Alibaba, with an initial purchase of around $11 million (roughly 63,000 shares), sparking investor interest in the name. Other Chinese stocks were also added in the company’s most recent filings (Ark reports trades daily).
These moves notably coincided with divestitures of a number of top chip- and AI-related stocks, signaling a potential risk-off trade from one of the more bullish asset managers in the tech sector. Additionally, looking at how many investors are thinking along the same lines as Wood, it’s clear many of these moves into Chinese tech follow very strong momentum in this space.
We’ll ultimately have to see if the timing of these moves makes sense. Cathie Wood is among the most significant talking heads on Wall Street that make sizable and market-moving trades nearly daily. In the past, her track record has been mixed, depending on what part of the cycle we’re in.
But with the bull market continuing to rage on, this move is one that certainly makes sense, as Wood and plenty of other money managers look to take some profits and settle in for what could be a protracted period of volatility moving forward.
Alibaba’s increasing AI spend and improving capabilities in this space are some of the key reasons why Cathie Wood and others have jumped aboard the Chinese tech player. Indeed, if these investments can yield some growth acceleration, there’s good reason to believe BABA stock could have some serious upside from here.
Why?
Well, looking at the company’s valuation metrics above, it’s pretty obvious that as far as tech companies worth more than $100 billion are concerned, Alibaba has to be one of the cheapest such stocks on any index. Trading at just 21 times trailing earnings, and considering the fact that Alibaba’s forward multiple is higher than its trailing multiple, the market has priced in some growth slowdown in the stock.
In other words, holding all else equal, Alibaba’s top and bottom line growth rate is expected to slow, making this stock theoretically more expensive in the future (if the assumed growth rates materialize) than today.
That said, any sort of improvement around the company’s AI integrations and how that impacts its revenue could change the story. Cathie Wood and others appear to be betting that this will be the case.
The actions of market participants ought to be given a heavier weight than the rhetorical views of various talking heads or even Wall Street analysts. That said, these are the guys who do the heavy lifting on the homework front, and they really do dive deep into financial modeling and try their best to estimate where Alibaba’s revenue and earnings will be a year or so from now.
Looking at the chart above, BABA stock’s current price being so close to its target suggests many of the experts believe this is a Chinese tech giant that’s about fully valued. Given the run BABA has been on of late, it could also be the case that many top analysts have not had the chance to update their models (and push their price targets higher). That’s the game that’s played, and there’s often a period of catch-up for analysts to try to align their own targets with those of the markets.
That said, I do think this current backdrop likely reflects Alibaba’s future prospects relatively well. This is a company I think could have big upside from here, but there’s also plenty of risk to be considered. For now, I’m on the fence when it comes to buying into this rally or standing pat.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com