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Buy Alibaba (BABA) Despite Decline in Chinese Stocks?

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Chinese stocks have been on the decline recently. The BATS Chinese stocks have been under pressure, and the losses for Baidu (BIDU - Free Report) and Sina (SINA - Free Report) have been so steep that they are on track to closing out the quarter posting the biggest losses since 2010. Tencent Holdings (TCEHY - Free Report) has also seen some recent setbacks, and the stock has yet to fully recover from the market pullback seen in May. Shares of Alibaba (BABA - Free Report) are down about 4% over the past three months as well.

In spite of this slump, Michael Binger, president of Gradient Investments, believes there is still hope for one of the BATS stocks. Binger commented, “I don’t think the BATS stocks are untouchable. I think you need to tread lightly,” further cementing his optimism about the group. Binger went on to say that his top choice for a stock to make a turnaround in the right direction would be Alibaba.

Alibaba is currently the leading e-commerce company in China and one of the leading e-commerce companies in the world. The company boasts 600 million plus active users and is growing fast. Binger believes that in around 10 years the company could reach the same altitudes as that of Amazon (AMZN). Let’s take a further look into how the Chinese ecommerce giant can do in the future.

Bottom Line

Alibaba is currently listed at a Zacks Rank #3 (Hold), and last quarter, was able to beat our previous Zacks Consensus Estimates of $1.05 by 23 cents to post an EPS surprise of 21.90%. The e-commerce giant has been able to beat our consensus estimates three times in the previous four quarters for an average EPS surprise of 12.52%. Alibaba also has a Zacks Style Score of B in Growth, and the Zacks Consensus Estimates is calling for a 18.03% increase in earnings to go along with a 35.13% spike in revenue for the current quarter. Our consensus estimates are projecting double digit revenue increases through the following fiscal year as well.

On the other hand, Alibaba does hold some valuation issues. The stock has historically traded at a premium relative to its respective industry. Over the past three years, at its peak, the Chinese stock traded over 49X its forward 12-month earnings, and at its lowest, it’s traded 27X its forward 12-month earnings. The broader non-food retail wholesale market traded at 30X its F12M earnings and traded at 19X its F12M at its lowest.

Alibaba has shown promise to take some strides in the right direction despite it being in a slump along with the rest of the Chinese BATS stocks. Alibaba and the BATS stocks as a whole can be heavily dependent on the current trade dispute between the U.S. and China, and whether it escalates or not. The progress made, or lack of progress made, at the G-20 summit could either push or pull these stocks. If healthy discussions can emerge from the upcoming meeting, Alibaba has the potential to surge past its BATS peers as it has done the past three years.

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