Alibaba is down more than 10% since earnings, now what?

Key Points

• Alibaba stock is beaten down after earnings. However, the reason behind the decline doesn't add up at all. 
• There is plenty of opportunity backed by macro trends in China and proof of explosive financial recovery in the business, making it a bargain today.
• Analysts know it, Ray Dalio owns it, this stock is at the point of maximum pessimism, and that's where the big money is made.

There are deals, and there are deals, and in the world of internet stocks, Alibaba NYSE: BABA is the one stock sticking out like a sore thumb. At prices below $80.0 a share, the only thing you can hope for this stock is to skyrocket to meet its fair value, which will be revealed in just a bit.

Now, Charlie Munger, Warren Buffett's right-hand man in the giant holding company Berkshire Hathaway NYSE: BRK.A, trusted the numbers out of this company enough to buy it, and in true value investing fashion, he has held it through all the wild swings that the stock has brought on since.

However, Charlie, along with many other investors out there, made the honest mistake of thinking that Alibaba is a technology company when, in reality, it is part of the consumer discretionary sector. Here's the blunt expression typical of Munger. This simple statement is the reason why Alibaba is the best deal you'll find today.

Bears can hide, but they can't run

Bears are hiding in plain sight, pushing the stock down with excuses as silly as the latest withdrawal from management regarding the cloud business' spinoff. The fact is, these bears are getting outflanked by bulls more and more each day.

True, most investors were counting on these spinoffs to realize some of the locked value this stock is hiding, but this new pivot is better than it seems.

Considering that the Chinese retail segment makes up 86.5% of the company's total revenue, a simple delay in a spinoff seems a very unjustifiable reason to bring on a sell-off exceeding 10.0% in size. After all, the strength of the Chinese consumer will bring on the EPS expansion owed to patient shareholders.

You see, the very same misconception was the one to affect Tesla's NASDAQ: TSLA stock back in the day, when Bears took over the stock and sent it down the toilet by criticizing the company's software arm when, in reality, it is a car manufacturer! 

So look, Chinese retail sales were reported to be up 7.6% year-over-year in October, which is a testament to the efforts made by the government to stimulate the economy and raise its lackluster inflation levels.

Competitors like JD.com NASDAQ: JD are up 18.3% in the past month as earnings beat analyst expectations on the back of this consumer momentum.

However, Alibaba reported its own earnings beat, aided by an 18.0% bump in total China commerce revenue and a 53.0% increase in international commerce sales. Yet, because the cloud business, up 2.0% over the year and only represented around 15.0% of total revenue, will not be spun off, the stock came crashing down.

Maximum pessimism 

If this logic still needs to turn on a lightbulb over your head, then check this out. Investors like Ray Dalio have quietly invested in Chinese equities via the iShares MSCI China ETF NASDAQ: MCHI, indirectly investing in Alibaba as one of its top five holdings.

The rest of Main Street is still scared of investing in China. The recent decline in Alibaba is sure to shake off whatever is left of retail investors, particularly those who buy the story that scratching a cloud spinoff plan makes the company worth less instead of more.

The stock is worth more than ever, yet it is trading at prices not seen since its IPO in 2014, a true bargain. As the financials showcase in the third quarter of 2023, the company not only expanded its revenues, but margins advanced significantly.

Starting with operating margins, the return of the consumer has aided management's cost-cutting initiatives, as efficiency would show a margin of 16.0% compared to 13.5% a year prior. Net income margin is the most significant swing in this story though.

A loss of 20.6 billion RMB in 2022 leaves a giant gap compared to today's quarterly gain of 27.7 billion RMB, which not only brings the net margin up to 12.3% (still nowhere near its five-year average margin of 25.3%) but also boosts return metrics like ROIC (return on invested capital) and ROE (return on equity).

While the business seems to be looking to run at all cylinders again, and the financials definitely show, an unrelated factor in the cloud business is dragging the price down. As Sir John Templeton would say (and happily buy), this is the point of maximum pessimism.

Despite all the negative sentiment, analysts are still willing to stick their necks out and land on a price target of $130.5 a share, which calls for a 68.4% rally in the stock to make these predictions true.

Considering that PDD NASDAQ: PDD earnings are coming up, a similar earnings beat on the back of a strong consumer could make markets realize what they are missing out on by forgetting China's largest retailer and wholesaler: Alibaba.