Can Alibaba (BABA) and Baidu (BIDU) Stocks Keep Climbing?

The reopening of mainland China has sparked an extended rally among Chinese tech stocks. Now the question is could there be even more upside in Chinese tech equities?

In recent weeks, China has continued to be a bright spot in the global economy with Hong Kong’s Hang Seng Index up 8% in the last month. In comparison, here in the US the S&P 500 is down -2% in the last month with England’s FTSE 100 up +1%, India’s Sensex down -3%, and Japan’s Nikkei 225 down -7%.

Two stocks that have led the rally in Chinese equities on US stock exchanges are Alibaba BABA and Baidu BIDU. Let’s see if there is indeed more upside left in these two Chinese tech giants.

Overview

Alibaba has often been referred to as the Amazon AMZN of China as one of the leading e-commerce giants in China. Like Amazon, Alibaba has diversified its businesses ranging from logistics and food delivery to cloud computing.

Baidu has widely been regarded as the Google or Alphabet GOOGL of China as the country’s largest internet search engine provider. And similar to Alphabet, Baidu has broadened its horizon into cloud computing, artificial intelligence, and vehicle automation.

Investors and Wall Street alike have historically been content with paying a premium for shares of the two Chinese tech giants due to their expansive growth similar to their American counterparts. However, in recent years there has been much volatility among Chinese equities being traded on US exchanges with geopolitical tensions between the US and China.

The volatility was catapulted by concerns over the accounting practices of Chinese companies, causing the SEC to launch the Holding Foreign Companies Accountable Act (HFCAA) in which stocks that do not comply with potential audits face delisting on the US stock exchanges.

The delayed reopening of the Chinese economy was a further negative catalyst to many Chinese stocks being depleted over recent years. As China’s Zero Covid policy has now eased and geopolitical tensions have somewhat cooled there could continue to be extended rallies among these equities, especially for larger stocks that are expected to comply with the SEC such as Alibaba and Baidu.

Recent & Historical Performance

On US stock exchanges, Alibaba stock is up +14% over the last month, with shares of Baidu up +13%. Both have outperformed the broader S&P 500 benchmark and the Nasdaq.

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The suppression of Chinese tech stocks over the last few years is the reason for such impressive rallies. Alibaba is still down -45% over the last five years to roughly match Baidu’s -46% decline with both underperforming broader indexes. This is after Alibaba and Baidu stock had skyrocketed in parts of 2019, 2020, and into 2021, only to give back any gains.

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Valuation & FOMO

Monitoring valuation after Alibaba and Baidu’s massive rallies is definitely important because the fear of missing out (FOMO) may have swayed many to buy BABA and BIDU stock before their hefty decline over the last few years.

Still, FOMO can work both ways as Alibaba and Baidu shares have both rallied more than 60% off their October lows.

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At around $104 per share, Alibaba stock trades at 17.6X its current fiscal year earnings. In comparison, Baidu shares trade at $132 per share and 21.1X F1 earnings.

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Both stocks look attractive relative to their past, with BABA stock 65% below its five-year high of 51.3X and at a 43% discount to the median of 31.4X. Shares of BIDU also trade 65% below its five-year-long highs of 60.7X and at a 24% discount to the median of 28X.

Relative to the broader market, Alibaba stock still looks intriguing trading near the benchmark’s 17.3X with BIDU further above these levels.

Growth

Alibaba earnings are expected to drop -14% in fiscal 2023 but stabilize and rise 12% in FY24 at $7.98 per share. Sales are projected to decline -6% in FY23 and jump 12% in FY24 to $140.75 billion. Fiscal 2024 would be a stellar 150% increase from pre-pandemic levels with 2019 sales at $56.15 billion showing the company’s diversification into other business ventures looks prosperous.

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Pivoting to Baidu, earnings are now forecast to rise 3% in its current fiscal 2022 and pop 26% in FY23 at $10.92 per share. On the top line, sales are expected to decline -9% for FY22 but rise 11% in FY23 at $19.39 billion. Fiscal 2023 would represent 25% growth from pre-pandemic sales of $15.42 billion in 2019.

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Bottom line

The growth in Baidu’s bottom line is impressive, landing the stock at Zacks Rank #1 (Strong Buy). While Alibaba’s top-line growth and valuation are very attractive, the company does not have the same conviction on its bottom line, landing the stock at Zacks Rank #3 (Hold).

Most importantly the reopening and improvement of China’s economy could continue to support the growth of these Chinese tech juggernauts and sustain further rallies.

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