Is BABA's Decline Signaling a Fair Valuation?

Business Services company Alibaba is taking Wall Street by surprise today, falling to $73.35 and marking a -3.1% change compared to the S&P 500, which moved 0.0%. BABA is -33.06% below its average analyst target price of $109.58, 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 -40.3%, moving -16.6%.

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 16.7, based on its trailing EPS of $4.4. The company has a forward P/E ratio of 7.7 according to its forward EPS of $9.48 -- 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 second quarter of 2024, the consumer discretionary sector has an average P/E ratio of 22.06, and the average for the S&P 500 is 27.65.

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 53.06, 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 deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Alibaba's free cash flow, which was $25.29 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $25.68 Billion and they've been growing at an average rate of 11.5%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in BABA have received an annualized dividend yield of 9.5% on their capital.

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 0.18 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 3.18 as of the second quarter of 2024.

Since it has a Very low P/E ratio, an exceptionally low P/B ratio., and generally positive cash flows with an upwards trend, Alibaba is likely fairly valued at today's prices. The company has poor growth indicators because of an above average PEG ratio and weak operating margins with a stable trend. We hope you enjoyed this overview of BABA's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.