Alibaba Stock Looks Even Better After Solid Earnings

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Alibaba (NYSE:BABA) posted solid earnings and cash flow growth for the September 2019 quarter. Alibaba stock looks attractive given the company’s upside potential from here.

Alibaba Stock Looks Even Better After Solid Earnings

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Analysts put the stock’s potential at $200 per share, up almost 14% from today’s price.

According to the report, revenue was up 40% YoY to $16.65 billion. This was slightly below the previous quarter revenue of $16.74 billion. But BABA’s free cash flow in the September quarter was $4.3 billion, up 12% from the prior quarter’s $3.84 billion.

This means that the free cash margin increased from 23% to 25.8% this quarter over the prior quarter. That is very positive news. It is also an extremely high level of free cash flow per dollar of revenue.

For example, Amazon (NASDAQ:AMZN) just reported $5.2 billion in free cash flow for its latest quarter on sales of $56.6 billion in sales. That means its FCF margin is just 9.3% compared to BABA’s 25.8% FCF margin. And note that BABA has only 30% of the quarterly sales compared to AMZN.

Alibaba Stock Has Excellent Growth Prospects

Alibaba stated that it had served 693 million customers in the past year to September 30. In late September BABA projected that it will have over 1 billion active customers in less than 4.5 years by the end of its fiscal 2024 (March). That represents compound growth of 8.5% each year in its customer base.

Meanwhile, Ant Financial, which runs the Alipay app and which Alibaba now owns 33%, had 900 million annual active users in China. Together the two companies have 960 million active annual customers in China.

These numbers are gargantuan. They assure Alibaba investors that the company will continue to have massive revenue and earnings growth for the foreseeable future.

In my article “Alibaba Stock vs. Amazon Stock – Which Should You Buy,” last month I contrasted this growth and related KPIs with Amazon. There simply is no comparison since Alibaba’s customer base continues to dwarf Amazon’s.

Moreover, analysts believe that Alibaba is one of the few Chinese companies that really can attain a significant global customer level. This is also a significant potential growth driver.

By contrast, Tencent (OTCMKTS:TCEHY) and Baidu (NASDAQ:BIDU) offer mainly China-centric products.

Alibaba Stock More Headroom Than Amazon

Amazon’s market value is much greater than Alibaba’s. Amazon’s market value at $889 billion is almost twice Alibaba’s $459 billion stock market value. In other words, investors still have not valued at the lofty valuations that Amazon has.

For example, Amazon trades at a forward P/E ratio of 65x but Alibaba’s similar ratio is just 20x, according to Seeking Alpha. So even at the midpoint of these two ratios, 42.5x earnings, Alibaba should be trading at a price of $376 per share.

That price represents a potential upside of 114% for Alibaba. Let’s say it potentially takes 3 years for BABA stock to reach that valuation. The average annual compounded gain in Alibaba would be 29% per year.

The same is true if you compare the FCF yields of both companies. For example, AMZN stock has a trailing 12-month FCF of $20 billion, according to Seeking Alpha. Divide this by its $889 billion market value, gives AMZN stock a 2.2% FCF yield. This is very expensive.

But Alibaba stock made $18.2 billion in the last 12 months. Divided by its $459 billion market value, gives BABA stock an FCF yield of 3.9%.

So even if we use a 3.0% mid-point FCF yield (of AMZN and BABA’s FCF Yields) to value Alibaba stock, its upside is huge. BABA stock would be worth $667 billion (i.e, $20 billion in FCF divided by 3.0%). This is an upside of 45.2% from today’s price or $257 per share for Alibaba stock.

What Should Investors Do?

Given Alibaba’s strong recurring revenue, earnings, and free cash flow as well as its high margins on revenue, Alibaba stock is worth much more than today. In addition, there seem to be many more customers Alibaba can reach over the next three to five years  – 1 billion is their target – before Alibaba reaches any level approaching saturation.

One analyst believes that the near term sum-of-the-parts is $200 per share. This represents a potential upside of 13%. I have shown that compared to Amazon, Alibaba stock is worth anywhere from $257 to $376 per share.

The average of these three valuations is $284 per share, or 61% upside from today’s price. Assuming it takes 3 years to reach this level, the average annual gain in Alibaba stock is 17.1% per year. That is a great potential return for most investors.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review hereThe Guide focuses on high total yield value stocks, which includes both high dividend and buyback yields. In addition, subscribers a two-week free trial.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/alibaba-stock-looks-even-better-earnings/.

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