The new coronavirus outbreak has started in China and the recovery from the pandemic has already started. It may take a long time to fully recover from the economic impact of the coronavirus. In the meantime, however, only a few businesses will benefit, including e-commerce and cloud services. Ali Baba (NYSE:BABA) is China’s leader in both markets and, therefore, the Alibaba title should perform much better than it did.
IDC recently estimated that Alibaba controls 47% of the Infrastructure as a Service (IaaS) cloud market in China. Last year, Alibaba controlled about 55% of China’s e-commerce market share, by far the largest share of all companies.
In addition, CNBC Analyst Jim Cramer discussed the impact of COVID-19 on cloud services this week.
“The coronavirus has created a magnificent bull market in cloud computing,” said Cramer. At the time, he was specifically talking about Microsoft (NASDAQ:MSFT).
In addition, the media likes to call Alibaba “the Chinese Amazon” and for good reason. That said, Justin Post, analyst at Bank of America, recently discussed the prospects for Amazon (NASDAQ:AMZN) due to coronavirus.
“Like Target, we anticipate an increase in orders on Amazon given the decrease in shopping center / store purchases, as well as rapid changes in category composition and inventory disruptions that will create cost inefficiencies in the system”, said Post.
It is difficult to anticipate exactly what type of figures Alibaba will put in place during the first two quarters of 2020 given the chaos of COVID-19. Overall, however, investors should certainly be prepared for some disappointment. Alibaba management said the number of retailers and restaurants will drop and travel will also suffer. At the same time, sales and delivery of groceries should be boosted, as well as cloud-based digital communications and videoconferencing services.
In early March, the logistics company Cainiao, majority owned by Alibaba, returned to production levels before the epidemic. Since then, the Ele.me meal delivery service has been operating at full capacity.
Also, Alibaba’s e-commerce competitor JD.com (NASDAQ:JD) recently guided revenue growth of 10% in the first quarter of 2020. These indications take into account the impact of the coronavirus.
Collectively, e-commerce and cloud services are solid businesses. Like any other business, Alibaba’s business will be affected by COVID-19, as will Amazon and Microsoft. However, long-term investors seem to see the big picture with Amazon and Microsoft. Since the beginning of the year, the AMZN share has increased by almost 6% while the MSFT share has increased by only 2%. Meanwhile, Alibaba stock is down 8.3% and JD stock is up 17.3% over the same period.
Long-term outlook for Alibaba Stock
Even though Alibaba’s numbers were hit hard in the first quarter, there is a silver lining in this epidemic. Quarantines can help accelerate the long-term digital transformation of the global economy.
Stubborn consumers may be forced to try Alibaba’s delivery, grocery and videoconferencing services for the first time. And once they have experienced and become familiar with them, they can stay with them.
At the same time, the traditional competition from brick and mortar is crushed. Of course, Alibaba’s retail sales could be negatively affected in the first quarter. But it seems likely that the company will gain significant market share from physical retailers – many of which closed during the epidemic. Some may not survive the ordeal at all.
In addition, the BABA share currently has a forward earnings multiple of approximately 22. So for a company that reported 38% revenue growth and 58% net profit growth in the last quarter, it s is an extremely inexpensive multiple. Add the support of the Chinese government and the fact that Alibaba’s stocks are exposed to many of the biggest secular growth trends in technology, and Alibaba looks like an easy buy at current prices.
Wayne Duggan has been an American contributor to News & World Report Investing since 2016 and is a writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense”, which focuses on psychological investing and practical strategies to outperform the stock market. At the time of this writing, there was long BABA action.