1 Growth Stock Down 63% to Buy Right Now

Alibaba (NYSE: BABA) is often considered a bellwether of China's economy. It owns the country's largest e-commerce marketplaces and top cloud platform, as well as brick-and-mortar stores, a logistics business, and digital media services.

Alibaba has been a high-growth stock over the past decade. From fiscal 2014 to 2024 (which ended in March), its revenue expanded at a compound annual growth rate (CAGR) of 33% as its adjusted net income increased at a CAGR of 19%. The stock soared from its initial public offering (IPO) price of $68 per American depositary share (ADS) on Sept. 18, 2014, to an all-time high of $306.16 on Oct. 27, 2020.

Image source: Getty Images.

But today, Alibaba's stock trades at about $113, having shed more than 60% of its value as it faces tough macro, competitive, and regulatory challenges. Those headwinds haven't fully dissipated, but I think it's poised to bounce back for four simple reasons.

1. It's overcoming its biggest challenges

Alibaba suffered a major setback in 2021 after China's antitrust regulators slammed it with a record $2.75 billion fine and barred its e-commerce business from locking its merchants into exclusive deals, using aggressive loss-leading promotions, and making unapproved investments and acquisitions. Those restrictions made it easier for smaller competitors like PDD and JD.com to catch up.

As Alibaba grappled with those regulatory and competitive challenges, China's macro environment deteriorated as the pandemic disrupted multiple industries and the government hobbled its own recovery with draconian "zero-COVID" lockdowns. Those headwinds further throttled the growth of its e-commerce and cloud businesses.

Yet, Alibaba has now fully lapped those regulatory setbacks. China also recently rolled out new stimulus measures to stabilize its economy. Therefore, Alibaba will continue to face competitive pressures in China, but its core businesses should warm up again as the regulatory and macro headwinds gradually dissipate.

2. Its growth is accelerating and stabilizing

Alibaba's growth decelerated in fiscal 2022 and 2023 as it struggled with those macro, competitive, and regulatory challenges. But in fiscal 2024, its revenue and adjusted net income growth accelerated again.

Data source: Alibaba. FY = fiscal year.

That growth was driven by the faster growth of its overseas e-commerce marketplaces (including Lazada in Southeast Asia, Trendyol in Turkey, and AliExpress for cross-border sales) which offset Taobao and Tmall's slower growth in China.

Alibaba's Cainiao logistics unit also evolved into a new growth engine as it provided more of its services to third-party customers. Its cloud infrastructure business, which suffered a slowdown as the macro headwinds drove many of its clients to rein in their software spending, also stabilized in the second half of the year.

From fiscal 2024 to 2027, analysts expect Alibaba's revenue and net income to grow at a CAGR of 8% and 21%, respectively. It certainly won't grow as rapidly as it did over the past decade, but it should keep growing as it remains the 800-pound gorilla of China's e-commerce and cloud markets for the foreseeable future.

3. It's still generating a lot of cash

Alibaba's top-line growth is cooling off, but it's returning a lot of its cash to its investors. It bought back $12.5 billion in shares in fiscal 2024 and approved its first annual cash dividend of $1 per ADS earlier this year. It also paid out a one-time special dividend of $0.66 per ADS in June. Alibaba's forward yield of 1.8% might not attract any serious income investors yet, but its low payout ratio of 51% should give it plenty of room for future dividend hikes.

4. It looks ridiculously cheap relative to its growth potential

Last but not least, Alibaba's stock looks dirt cheap at 15 times next year's earnings. If China's aggressive stimulus measures kick-start its economy again, its e-commerce and cloud businesses should eventually expand and boost its valuations.

Alibaba was in the penalty box over the past four years, but it's finally worth buying again. Its stock could remain volatile as investors evaluate China's latest stimulus plans, but it should head higher as its biggest challenges fade away.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.