Alibaba stock earnings came out, everything changed

Every now and then, investors look back and wish they had jumped at those opportunities that seemed “too good to be true” at the time. Ones that other fearless traders have taken advantage of, and now have to sit back and watch as those investors boast double – sometimes triple digit returns. Contrary to popular sentiment, Alibaba Group NYSE: CHILD is one of those names today.

For reasons that will become clear shortly, there is a significant tailwind pushing bulls to consider China as the next stop for attractive equity investments. Any other market would have already seen massive inflows. But fear dominates sentiment towards China due to “geopolitical risks.” It’s a fancy expression for “we fear what we don’t know.” And there are times to ignore that expression. Profit is profit, whether in the United States or on the Moon.

Management stood firm with shareholders this quarter, and the outlook for this year appears more optimistic than ever. To put it this way, Jim Rogers (George Soros’ right-hand man since then) says he is “optimistic about the Chinese stock market recovery” and who better to lead the pack than a blue chip tech stock like Alibaba.

Market forces at play

The CSI 300 Index, which is the broadest index of the Chinese stock market, fell to a five-year low. In contrast, other emerging markets, such as Brazil, have flirted with their own 52-week high prices.

You can check this trend in real time by following the iShares MSCI Brazil ETF NYSEARCA: EWZ against the iShares MSCI China ETF NASDAQ:MCHI, which is as low as it was in 2011! However, given the concern that has taken over the global market, today only the US market indices continue to reach all-time highs.

One thing remains the same in any financial market: the debt cycle – and the price of that debt – determines business prospects and valuations (stock prices). Whenever a country’s bond yields fall significantly below a stock market’s dividend yields, you can bet that a money shift will soon occur, turning money from bonds into stocks.

Today, the dividend yield on the China ETF is 3.7% annualized, while the ten-year Chinese bond yield pays a coupon of 2.5%. Remember that the China ETF excludes some of the CSI 300 stocks that cannot be traded in the US, some of which pay dividends well above 6.0%.

Judging by how stocks now pay a better yield than bonds, you can be sure that the macro outlook suggests stocks are undervalued in the region. However, don’t just take it at face value; look at guys like Ray Dalio, who have committed funds to China since November 2023.

Regardless, fear continues to reign and prevent investors from gaining enough confidence to buy this stock market. The truth is that analysts and insiders have so much confidence in the stock that an upside potential of close to 62.0% compared to the stock’s current value cannot be ignored.

Everything just changed

To save you time, here’s the gist you can extract from the company’s latest quarterly earnings report. Overall, Alibaba reported revenue growth of 5.1% and a slight increase in gross margins to 40.0%. But it is obvious that not everyone has grasped this fact.

Investors are selling the stock as much as 5% this morning as Wednesday’s trading session opens. Why? Who wouldn’t panic when they saw a 77% drop in the net profit of a company they invested their money in? The truth is that the company’s actual net income wasn’t that bad.

Management has reported a write-down in capital charges along with a write-down in its equity investments, and who hasn’t suffered a paper loss on equity investments in a stock market that is hitting 2011 lows? Investment bankers call these “non-core” items, which are added to reflect the true earnings power of the core business.

By adding these non-core items to the financials, Alibaba increased its operating profit by 5.4% on revenue growth of 5.1%, reflecting its increasing operational efficiency throughout the year. Knowing what you know now, you can probably imagine that the fire sale is unwarranted.

This is also why analysts may soon raise their stock price target to $119.80 today after reviewing the current state of the business, but wait, there’s more. Management added $25 billion to the stock buyback program, for a total of $35 to discretionarily purchase cheap shares today; by the way, it represents 18% of the company’s size!

Of note, Alibaba has grown its retained earnings by an average of 87% over the past 10 years, which exceeds NVIDIA NASDAQ:NVDA with its average growth of 7.6% the only element that drives company (and stock) valuations.

NVIDIA stock is all the rage today, hitting all-time highs as Alibaba struggles at prices not seen since 2015; please make sense of it. You can’t, which is why this is an opportunity to take advantage of massive market mispricing, where you can potentially look back on your decision and say, “Boy, am I glad I didn’t share the market’s fear.”

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