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Alibaba (BABA) vs. Starbucks (SBUX): Which Stock is Better if China Reopens

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With more countries across Asia reopening, China is expected to reopen as well for international business and travel at some point in the near future. Although the country has not committed to reopening it is thought to be months away from doing so.

News of such caused a rally in Chinese stocks last week. Investors may be considering these equities among other companies that add exposure to China’s huge economy to their portfolio.

Let’s take a look at two stocks investors may be considering as the world’s second-largest economy is expected to eventually loosen its Zero-Covid policy.

Alibaba (BABA - Free Report)

Alibaba is one of the most recognizable companies in the world with sales of $133.27 billion last year.

BABA still trades 60% below its 52-week highs after the recent rally among Chinese equities. The rally boosted the stock from its recent low of $58.01 per share in October. However, BABA is still down -45% YTD to underperform the S&P 500’s -21%. This is on par with its peer group’s -42%. The last few years have been very tumultuous for the stock as a large part of BABA’s decline hinged on fears of Chinese stocks being delisted on U.S. stock exchanges and the Chinese government cracking down on its big tech firms.

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Unfortunately for BABA, earnings estimate revisions have also started to decline again. And Alibaba’s core e-commerce business and online retail businesses won’t necessarily be directly affected by a China reopening which is something investors may want to be mindful of. 

While BABA still trades more reasonably than its past with a P/E of 11.4X, fears of the Chinese government heavily regulating domestic tech companies are still concerning as well and may take its toll on the company’s future earnings power.

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Year over year, BABA’s earnings are now expected to be down -11% in fiscal 2023 but rise 7% in FY24 at $7.90 a share, which is down from $8.33 per share 90 days ago. Sales are now expected to be virtually flat this year and rise 11% in fiscal 2024 to $148.21 billion.

BABA currently lands a Zacks Rank #4 (Sell) in correlation with earnings estimate revisions recently trending down for the current quarter, fiscal 2023, and FY24. While the stock may see a short-term boost from China reopening it won’t necessarily see the direct effects of increased consumer travel and spending from foreigners.

Starbucks (SBUX - Free Report)

Starbucks (SBUX - Free Report) is a viable option that investors may want to consider as the company has considerable exposure to China, operating over 6,000 stores in the country. The U.S and China combined account for 61% of the company’s global portfolio.

China’s zero covid policy continues to take a toll on Starbucks’ revenue. During Starbucks recent fiscal Q4 earnings report earlier this month, the company’s International revenue declined 7% from Q4 2021 to $1.8 billion, primarily attributable to Covid-19 related restrictions in China. Operating income for its International segment was also down 42% at $217.6 million compared to $377.4 million in Q4 2021.

Overall, China revenue was down -20% during the quarter at $775 million compared to $964 million in Q4 2021.

With SBUX stock down 22% from its highs, the reopening of travel to China and locals being able to live their lives more freely without the scrutiny of Zero-Covid could give Starbucks a nice boost now and be very beneficial long term. The company is directly affected by consumer spending and declining store sales as its locations remain popular with Americans and other foreign visitors to China.

SBUX’s -21% YTD performance is near the broader market’s decline. Over the last five years and prior to the pandemic, we can see SBUX is up +61%, which should be noted is considerably better than BABA’s -65% decline and also outperformed the benchmark.

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SBUX also trades reasonably relative to its past with a forward P/E of 27.5X. This is slightly above the industry average of 23.7X but well below its decade-high of 97.6X and near the median of 28.8X. Also, it is quite plausible that a China reopening could lead to immediate growth for SBUX.

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Year over year, earnings are now expected to be up 15% in fiscal 2023 and rise another 17% in FY24 at $3.99 per share, which is up from $3.96 at the beginning of the quarter. Top line growth is expected, with sales expected to be up 11% in fiscal 2023 and rise another 11% in FY24 to $39.93 billion.

SBUX currently lands a Zacks Rank #3 (Hold). EPS estimate revisions have slightly trended down for the current quarter and fiscal 2023, but are going up for FY24. Earnings estimate revisions could continue to improve if China reopens. SBUX also offers patient investors a solid 2.11% annual dividend yield at $1.96 per share.

Bottom Line

The expectation that China will ease its Zero-Covid policy could certainly be a short-term catalyst for Chinese big tech companies like Alibaba, Baidu (BIDU - Free Report) , and more. However, increased travel and consumer spending from foreigners won’t necessarily have a direct effect on their businesses.

Starbucks on the other hand is a very viable investment for a reopened China as the company continues to grow its operations in the country and will remain popular among Americans and other foreign visitors. This may also help eliminate some of the risks associated with the regulations of Chinese companies, but still add the valuable foreign exposure China offers.


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