Standing out among the Street's worst performers today is Alibaba, a business services company whose shares slumped -3.0% to a price of $110.55, 31.85% below its average analyst target price of $162.22.
The average analyst rating for the stock is buy. BABA underperformed the S&P 500 index by -3.0% during today's afternoon session, but outpaced it by 38.9% over the last year with a return of 50.8%.
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 14.8, based on its trailing EPS of $7.48. The company has a forward P/E ratio of 1.4 according to its forward EPS of $9.87 -- 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 third quarter of 2024, the consumer discretionary sector has an average P/E ratio of 20.93, and the average for the S&P 500 is 29.3.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Alibaba was $25.29 Billion as of its last 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 7.4%. 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 6.7% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Alibaba's P/B ratio of 0.25 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 2.93 as of the third quarter of 2024.
Alibaba is likely fairly valued at today's prices because it has a Very low P/E ratio, an exceptionally low P/B ratio., and generally positive cash flows with an upwards trend. The stock has poor growth indicators because of its weak operating margins with a stable trend, and an above average 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.
