Alibaba Stock Is a Bargain at One-Third the PE Ratio of Amazon Stock

Alibaba (NYSE:BABA) has had it rough for several weeks, or longer. Baba stock has taken a big hit in the past week as Chinese regulators clamped down on it.

BABA Stock Weakened Before the Coronavirus and Looks Worse Now

Source: BigTunaOnline / Shutterstock.com

However, the net result is the stock is a very good bargain here. Investors might want to take another look at Baba stock as its value is quite apparent.

Moreover, the company is not going to disappear. Chinese regulators are accusing the company of monopolistic practices, according to CNBC and Bloomberg.

But here is the bottom line. The stock was already cheap and now it is even cheaper, worthy of another look by many value investors.

Alibaba’s Cheap Valuation Now

For example, Baba stock is now down almost $95 from its recent peak on Oct. 27 of $317.14 to $222.36 on Dec. 28. That is a fall of 30% from its peak.

However, Baba stock is down 15% since Dec. 16, when its troubles with regulator authorities in China started percolating.

I wrote in my article on Dec. 9, that Alibaba is a great bargain now. I showed that Alibaba has shown revenue growth of 30% year-over-year. In addition, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) up 28% year-over-year.

Moreover, Alibaba reported that its quarterly free cash flow grew 33% year-over-year, as of Q3. But this is not reflected in its pro forma forward valuation.

For example, Baba stock has a forward price-to-earnings (P/E() multiple of just 17.7 times, according to estimates from Seeking Alpha. That is for the year to March 2022, or a little over a year from now.

Comparison With Amazon

By contrast, the same forward P/E estimates for Amazon (NASDAQ:AMZN) are for 73.3 times earnings for the year ending Dec. 2021. Even if we use the year to Dec. 2022, the P/E falls to 52 times, assuming earnings per share (EPS) hits $63.00.

In other words, Baba stock has a P/E multiple almost one-third the size at 17.7 of Amazon’s at 52 times earnings, both for different periods in 2022.

But, as I pointed out in my article, both companies are still growing very quickly. In other words, the quality of the earnings of both companies is very similar.

Moreover, here is something very interesting. Amazon stock trades for just 3.5 times sales to Dec. 2021, but Baba stock is at 4.3 times sales to March 2022. In other words, they both have a similar price-to-sales ratio.

This implies that Alibaba makes much higher earnings margins than Amazon. For the same sales, Alibaba makes much more money than Amazon. For example, my Oct. 6 article showed that Alibaba’s free cash flow (FCF) margins were 35.7% in Q2 vs. Amazon’s 10.4% margins.

What’s in Store for Baba Stock

The truth is Alibaba is a valuable company and BABA stock is a bargain right now, especially given its growth and low multiples.

The enterprising investor will figure this out and take advantage of the political turmoil that the company seems to be wrapped up in. For example, CNBC reports that Alibaba forces merchants to sign exclusivity agreements with them, forcing out competitive forces. However, there were no examples given in the news reports.

However, Alibaba seems to have immediately capitulated to their government and decided to worth with them about changing their procedures.

Moreover, Alibaba’s 33% owned subsidiary Ant Financial has had its IPO postponed by authorities in China. On top of this US authorities have now passed a law that gives Chinese and other foreign companies to have US auditors pass on their books. This might lead to investors selling their shares in Alibaba if they believe that they will be delisted from US exchanges.

I wrote in my prior article that it is actually better for investors to own ordinary shares rather than ADRs (American Depository Receipts). This is because ADRs have higher implied costs in their bid-ask spreads. Therefore, for most investors, Baba stock offers a good bargain right now.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

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


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/baba-stock-is-a-bargain-at-one-third-the-pe-ratio-of-amazon-stock/.

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