The start of the second-quarter earnings season has not been as promising for tech stocks as expected. Despite the optimism surrounding the artificial intelligence sector, it seems that the hype is not translating into strong financial results.
Although Apple is set to report its earnings next week, analysts are cautiously optimistic about the stock. However, there has been a decline in the number of bullish investors, and the average Wall Street price target is almost on par with the current trading price. A concern among analysts is the potential underwhelming performance of iPhone sales, which make up half of Apple’s revenue.
Tech companies need robust earnings to justify their substantial year-to-date gains. While Apple’s stock hasn’t skyrocketed like Nvidia, it has still seen an impressive 54% increase since the beginning of the year. With a forward earnings multiple of nearly 30 times, Apple’s valuation is well above its five-year average of 23 times.
On the other hand, Alibaba Group Holding, a Chinese e-commerce and cloud company, has only experienced a modest 5% gain in its American depositary receipts this year. Its forward earnings multiple stands at just over 11 times, compared to its historical average of over 19 times.
Recent fluctuations in Alibaba and other Chinese stocks can be attributed to hopes of economic stimulus as Beijing strives to revive its pandemic-hit economy. China has struggled to recover compared to the ongoing strength in the United States.
While Alibaba still lags behind its U.S. Big Tech counterparts in terms of market value, its relatively lower valuation suggests that some Chinese tech stocks might offer opportunities for bargain hunting in the industry.
The Appeal of Alibaba in Comparison to Apple
In a report by the Bear Traps Report’s Larry McDonald, the remarkable sales growth of Alibaba is highlighted, especially when compared to Apple. McDonald argues that not only does Alibaba offer significantly higher growth at a much lower price, but it also faces lower political risks in China. He deems Apple’s reliance on China for production as an “absurd passive investing overdose” and suggests that it is highly unsustainable.
Challenges for Apple’s Supply Chain
Despite Apple’s efforts to diversify its production, the majority of its manufacturing still takes place in China. Relocating this extensive supply chain would require hundreds of billions of dollars. However, tensions between the United States and China persist, causing concerns for Apple and other companies. Rising wages, backlash against Western companies, and potential bottlenecks in China have compelled Apple to explore other regions in Asia. Nevertheless, this process is slow, expensive, and laborious.
Lingering Risks for Apple
Despite their best efforts, Apple and other companies are not completely immune to risks associated with their exposure to China. Even though their stocks seem to be priced for perfection, uncertainties remain.
Alibaba: A Strong Contender
Alibaba is not the only company dependent on the health of the Chinese consumer. Apple’s iPhone 13, for instance, was the best-selling smartphone in China last year. However, investors have reasons to express caution when considering Chinese stocks as a whole due to currency risks, uneven economic performance, and government control.
Highlighting Alibaba’s Strength
Nevertheless, Alibaba demonstrates promising potential on an individual basis. Benchmark analyst Fawne Jiang notes that Alibaba’s core marketplace has recovered steadily in the first fiscal quarter. The company’s consumer-centric approach has shown early signs of success, resulting in favorable year-over-year sales comparisons. Jiang reiterates a Buy rating and sets a $180 price target for Alibaba’s shares, as the company’s valuation appears attractive amid ongoing restructuring.
While investing in Alibaba may not guarantee success, it is undoubtedly a more cost-effective option compared to Apple. The impressive sales growth, combined with favorable market conditions and a consumer-centric approach, positions Alibaba as an appealing choice for investors.