We recently compiled a list of the 7 Blue Chip Stocks with Low PE Ratios.In this article, we are going to take a look at where Alibaba Group Holding Limited (NYSE:BABA) stands against the other blue chip stocks with low PE ratios.
In the current financial landscape, characterized by shifting market sentiments and evolving economic indicators, the spotlight on blue-chip stocks with low price-to-earnings (P/E) ratios has intensified. As investors seek stable and potentially undervalued options, understanding the broader context of interest rate movements, inflation trends, and market performances becomes crucial.
Recent data indicates that bond traders are increasingly skeptical about the Federal Reserve's likelihood of implementing further rate cuts this year. Current market expectations reflect only a 20% chance that rates will remain unchanged during either the November or December meetings. Just last week, following an unexpectedly strong jobs report, traders had anticipated over 50 basis points in cuts by year-end. This significant shift underscores a growing belief that robust U.S. economic data is diminishing the probability of consecutive cuts, which has implications for investment strategies across the board.
As a result of these evolving expectations, the dollar is currently on track for its second consecutive weekly gain, bolstered by a 0.5% increase this week alone. The Bloomberg Dollar Spot Index has gained 1.7% in October, propelled by resilient economic indicators that suggest a more cautious approach from the Fed. In contrast to other central banks that may pursue additional monetary easing, the Federal Reserve appears to be recalibrating its policy stance from a position of economic strength. This backdrop adds an additional layer of complexity for investors assessing their portfolios, particularly those interested in blue-chip equities.
Furthermore, the recent performance of the stock market has been notable, with major indices reaching new all-time highs as earnings season kicks off. A wide range of sectors within the market has shown improvement, with the S&P 500 extending its winning streak into a fifth consecutive week, the longest since May. The KBW Bank Index also saw significant gains, surging by 3% and reaching its highest level since April 2022. This upward momentum can be attributed to several financial institutions posting better-than-expected earnings, signaling a recovery that is gaining traction across various sectors.
Interestingly, inflation trends are also contributing to the current economic narrative. Recent reports indicate that U.S. producer prices remained unchanged in September, reflecting a more favorable inflation outlook. Although year-on-year increases in the producer price index (PPI) showed a modest rise of 1.8%, the smallest gain in seven months, market analysts predict a potential 25 basis points reduction in interest rates next month. Despite the uptick in inflationary pressures in certain sectors, most economists do not view these trends as signs of a broader resurgence in price pressures, suggesting that the overall economic environment remains stable.
As we navigate through this analysis, it will be vital to consider the backdrop of current economic conditions, including interest rate expectations and inflationary trends, to better understand the investment landscape and identify potential opportunities. With that, let us delve into the profiles of these promising blue-chip stocks that align with the search for stable investments amidst a fluctuating market.
Our Methodology
For this article, we use stock screeners to identify nearly 12 stocks above $200 billion market cap and a forward Price to Earnings (P/E) ratio of less than 15 as of October 11, 2024. Next, we narrowed our list to 7 stocks that were most widely held by institutional investors. The hedge fund sentiment was taken from Insider Monkey’s Q2 database of 912 hedge funds. The seven blue chip stocks are listed in descending order of their forward price to earnings ratio.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An e-commerce platform displaying a wide range of products to customers online.
Alibaba Group Holding Limited (NYSE:BABA) is one of the largest e-commerce and technology conglomerates in the world, making it a prime candidate for inclusion among blue-chip stocks with low price-to-earnings (PE) ratios. As of October 11, 2024, Alibaba Group Holding Limited (NYSE:BABA) boasts a forward PE ratio of 11.63, a highly attractive figure for investors seeking undervalued opportunities within the tech sector. Despite missing earnings expectations in its Q1 2025 earnings report, the company's long-term fundamentals suggest resilience and potential for future growth.
In the June quarter of 2024, Alibaba Group Holding Limited (NYSE:BABA) reported a revenue increase of 4% year-over-year, reaching RMB 243.2 billion, driven primarily by its domestic commerce and international segments. The company’s adjusted EBITDA, though down 1%, would have shown growth if not for changes in employee compensation structures. With a non-GAAP net income of RMB 40.7 billion and a strong cash position of RMB 405.7 billion, Alibaba’s financial health remains robust. Its free cash flow, while decreasing year-over-year, still stood at RMB 17.4 billion, showcasing the company's ability to generate significant liquidity even in a challenging macroeconomic environment.
Key growth areas for Alibaba Group Holding Limited (NYSE:BABA) include its cloud computing and artificial intelligence (AI) divisions. Alibaba Cloud, excluding its consolidated subsidiaries, returned to positive growth, with AI-related product revenues seeing triple-digit growth. This indicates Alibaba's potential to further penetrate the AI and cloud markets, leveraging its existing infrastructure to capitalize on growing demand for these services.
Moreover, the company is executing a well-rounded strategy of increasing operational efficiency and monetization across its various segments, including e-commerce, cloud, and digital commerce. Its international business, particularly Alibaba International Digital Commerce (AIDC), reported 32% revenue growth in the quarter, with cross-border e-commerce continuing to drive strong order growth.
In conclusion, Alibaba Group Holding Limited (NYSE:BABA) low forward PE ratio, combined with its strong presence in e-commerce, cloud, and AI, positions the company as an undervalued blue-chip stock with substantial growth potential. Its solid cash reserves and forward-looking strategy further reinforce its status as a stable investment for value-oriented investors.
Oakmark International Fund stated the following regarding Alibaba Group Holding Limited (NYSE:BABA) in its Q3 2024 investor letter:
“Alibaba Group Holding Limited (NYSE:BABA) was the top contributor during the quarter. The China-headquartered consumer discretionary company’s stock price rallied following the announcement of a multipronged stimulus package by the Chinese government. Despite the stock’s strong performance for the quarter, we continue to believe there is upside in the name and that the market is not fully pricing in the turnaround potential for the e-commerce business or other optionality the company possesses.”
Overall BABA ranks 6th on our list of the blue chip stocks with low PE ratios. While we acknowledge the potential of BABA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BABA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
