Specialty Retail company Alibaba is taking Wall Street by surprise today, falling to $87.98 and marking a -4.5% change compared to the S&P 500, which moved -0.0%. BABA is -37.09% below its average analyst target price of $139.86, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Alibaba has underperfomed the S&P 500 by -31.0%, moving -13.4%.
Alibaba Group Holding Limited, through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Alibaba's trailing 12 month P/E ratio is 22.2, based on its trailing EPS of $3.96. The company has a forward P/E ratio of 9.4 according to its forward EPS of $9.36 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.
To better understand BABA’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Alibaba’s PEG is 69.48, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on BABA's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-03-31 | 868,687,000 | 549,695,000 | 36.72 | -0.11 |
| 2022-03-31 | 853,062,000 | 539,450,000 | 36.76 | -10.95 |
| 2021-03-31 | 717,289,000 | 421,205,000 | 41.28 | -7.44 |
| 2020-03-31 | 509,711,000 | 282,367,000 | 44.6 | n/a |
- Average gross margin: 39.8 %
- Average gross margin growth rate: -4.7 %
- Coefficient of variability (higher numbers indicating more instability): 9.6 %
We can see from the above that Alibaba's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Alibaba was $199.75 Billion as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, BABA is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 2.6% and has on average been $188.73 Billion.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Alibaba's P/B ratio of 0.23 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Consumer Discretionary sector was 3.12 as of the first quarter of 2023.
Alibaba is likely undervalued at today's prices because it has an average P/E ratio, an exceptionally low P/B ratio, and a steady stream of strong cash flows with a flat trend. The stock has mixed growth prospects because of its strong margins with a negative growth trend, and a negative PEG ratio. We hope this preliminary analysis will encourage you to do your own research into BABA's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
