Alibaba (NASDAQ:BABA) stock has done well since I last wrote about it on June 1. The price was $206.57 on June 1, and it has risen over 10% since then. I think Alibaba stock is still undervalued and likely to rise much more.
This Chinese online e-commerce company now reaches 85% of the Chinese developed population and 45% in less developed areas. This is according to RBC Capital’s Mark Mahaney. He is quoted in Barron’s saying that Alibaba is “the single best play on the growth of the internet in China.”
Mahaney argues that the Covid-19 crisis shows Alibaba’s “value proposition” to its customers. In addition, he believes it “is experiencing some structural wins from the crisis in terms of online food/grocery demand and online education.”
In fact, the company recently reported a partnership with Beyond Meat (NASDAQ:BYND) for the sale of its products in grocery stores throughout China.
What Analysts Predict About Alibaba Stock
Analysts polled by Seeking Alpha expect revenue to climb 31.7% to $94.1 billion for the year ending March 2021 from $72 billion in 2020. Moreover, these analysts expect a 25.7% growth in sales to $118.4 billion by March 2022. These are significant growth rates.
In addition, earnings per share are forecast to rise by 17.8% to $8.75 per share for the year ending March 2021. The next year EPS is forecast to rise 27% to $11.05 in the year to March 2022. These again are very high expected growth rates.
But interestingly, Alibaba stock trades for just 28 times the March 2022 earnings expectations. I find that very peculiar. Many other stocks with these high growth rates would have much higher valuation ratios.
One of the reasons Alibaba is at a discount could be because of the recent issues with U.S. Chinese stocks. I wrote about this in my last article.
I do not think Alibaba engaged in fraudulent accounting activities. Nevertheless, this worry could account for a discount that investors inflict on Alibaba stock in terms of willingness to pay for its growth.
However, some analysts may believe the stock should receive a discount because of the problems with its international unit. The Wall Street Journal recently wrote about the replacement of the CEO of its Southeast Asia e-commerce unit for the third time in two years.
Alibaba’s Growth Drivers
One major growth driver is the revival of the Chinese economy from the Covid-19 related recession. It is seeing an “uptick in demand from its massive consumer market,” as Barron’s recently reported.
Therefore, many people are now optimistic about the implied long-term value in Chinese stocks. Alibaba is the ultimate Chinese consumer stock, given its huge reach throughout the economy.
Moreover, from a financial standpoint, its free cash flow generation is very impressive. The company produced $20.9 billion in FCF on revenues of $71.97 billion in the year ending March 2020. That represents an FCF margin of 29%, a very high measure of cash producing profitability.
For example, compared to Amazon.com (NASDAQ:AMZN) this is very impressive. Amazon generated a similar amount of FCF, $20.9 billion, in 2019. But its sales were $280.5 billion. Therefore, its FCF margin was just 7.7%, not the 29% level at Alibaba.
But here is the valuation comparison. AMZN stock trades for 153 times 2021 estimated earnings, according to Seeking Alpha. Compare that to Alibaba stock which trades for just 28 times earnings.
That implies that Alibaba is worth a lot more than its present price.
What to Do With Alibaba Stock
There is no question that Alibaba is quite a bargain. For example, even if Alibaba traded at half of the P/E ratio of AMZN stock, Alibaba stock would gain a lot.
And this does not take into account Alibaba’s much higher earnings growth rates and its higher FCF margin. So investors in Alibaba have much to gain. They are getting a very bargain stock with a margin of safety.