60.2% Upside In This Forgotten Favorite

When we wrote about Apple’s bullish opportunity frankly we weren’t expecting it to be the only stock that held up in the market but the graphic below highlights just how awful Friday’s market was and how nothing escaped the onslaught but the Cupertino giant.

But what other stock could be on the verge of rising after a period of sustained underperformance?

Here’s the tease before the reveal.

Key Points

• Apple uniquely sustained its market value during a broad market downturn, serving as a prelude to identifying another promising stock.
• Alibaba, despite its recent price drop, maintains a strong financial position with substantial cash reserves, significant stock buybacks, and high profitability, alongside a modest dividend yield of 1.37%.
• With a conservative price target of $106 per share and potential for more, Alibaba is seen as undervalued. 

The Tease

What kind of stock could tempt you to buy in a market that is as red as the one above? Only one that has pristine fundamentals and appears steeply undervalued is worth considering. So let’s take a look at some metrics that might meet those criteria.

In the first quarter of 2024 alone, the company bought back almost $5 billion of stock, $4.8 billion to be precise. It also holds a boat load of cash on its balance sheet, $35.8 billion of cash in addition to $50.6 billion of short-term investments. Admittedly, this is offset by close to $20 billion in long-term debt but that’s nowhere near the reserves on the asset side of the balance sheet.

And then there are the cash flows, giant hoards of them that are produced quarterly. Last quarter alone, a whopping $7.8 billion was generated. Profitability is not in question either, the company has been wildly profitable and is forecast to be similarly so this year. Oh and did I mention it pays a dividend yield of 1.37% too?

With so much going for it, you might expect it’s been on a tear in recent years and yet its share price is down from over $300 per share to around $70 in just over 2 years.

So what stock is it?

The Reveal

The stock is Jack Ma’s Alibaba. And if analysts are to be believed it has considerable upside before reaching fair value. By the consensus forecast, Alibaba has upside to $106 per share but we think that may even be conservative.

When a discounted cash flow forecast analysis is run, Alibaba appears to have room to run all the way to $114 per share, suggesting as much as 60% upside opportunity at this time.

The challenge for investors now to get on board is the relative lack of growth, which has slowed considerably but make no mistake about it, Alibaba has grown substantially over the past 5 years, in each and every quarter without interruption. It’s the forward-looking growth that gets challenging. How can Alibaba continue to expand? It must do so internationally and that’s where competition gets awfully stiff.

Nonetheless, with a price-to-earnings ratio of 12x and a massive share buyback scheme in place, it will be hard to see Alibaba stay muted for long, absent a global conflict or a Chinese government intervention.