The recent rally surrounding tech stocks has driven valuations significantly higher in 2024. However, if you dig deeper, several China-based tech stocks continue to trade at a lower multiple, making them attractive bets for value investors right now.
In this article, I compare two such tech stocks, Shopify (TSX: SHOP) and Alibaba (NYSE: BABA), to see which is a better buy at the current valuation.
Is Alibaba stock undervalued?
Since its initial public offering (IPO) in 2014, Alibaba stock has trailed the broader markets by a wide margin. Today, it trades 75% from all-time highs, valuing the company at a market cap of US$195 billion. Here’s why I believe that the tech stock is undervalued at current prices.
In the fiscal third quarter (Q3) of 2024 (which ended in December), Alibaba reported an operating cash flow of US$9.1 billion and a free cash flow of US$8 billion. In the last three quarters, its operating cash flows have totalled US$22.4 billion, providing it with ample flexibility to reinvest in organic growth, acquisitions, and share buybacks.
Earlier this year, Alibaba announced a buyback program worth US$25 billion. In the last two years, it has repurchased shares worth US$23.3 billion, which suggests that Alibaba’s management team believes the stock is undervalued.
Alibaba aims to invest in core businesses such as e-commerce and cloud computing. In the e-commerce segment, Alibaba has outlined plans to focus on price competitiveness and user experience to drive higher engagement rates and repeat purchases. It is also looking to improve its product supply and expand its product portfolio, which is sourced directly from manufacturers.
Despite its massive size, Alibaba is on track to increase sales from US$121.6 billion in fiscal 2023 to US$140 billion in fiscal 2024. Its adjusted earnings are forecast to expand from US$7.64 to US$8.47 in this period.
So, priced at 9.4 times forward earnings, BABA stock is really cheap and trades at a discount of almost 40% to consensus estimates.
What is the target price for Shopify stock?
Shopify operates an e-commerce platform that helps small and medium businesses set up and run digital storefronts. Valued at US$100 billion by market cap, Shopify stock is down 50% from all-time highs, allowing you to buy the dip.
Part of an expanding addressable market, Shopify reported sales of US$7.1 billion in 2023, up from US$1.3 billion in 2019. While revenue growth has decelerated in recent years, sales increased by 24% year over year in Q4 of 2023.
In recent months, Shopify has exited the loss-making logistics business and reduced its workforce count to boost the bottom line. Now, analysts tracking Shopify stock expect earnings to grow by 60% annually in the next five years.
So, SHOP stock is forecast to end 2028 with adjusted earnings of US$7.5 per share. If the stock is priced at 30 times forward earnings, Shopify stock should trade around US$225 per share in May 2028, indicating an upside potential of over 200% from current prices.
The Foolish takeaway
Both Shopify and Alibaba seem enticing investments at current multiples. Investors can consider adding both these tech stocks to their equity portfolio and benefit from outsized gains in 2024 and beyond.
