Alibaba (NYSE:BABA) is down way off of its highs during the year. As a result, BABA stock is a great bargain now especially with its growing sales, earnings, and cash flow.
For example, as of Dec. 4, the stock is down almost $50 from its highs to $267.25 per share today. There really is no good reason, other than politics, for the BABA stock to be down 15.7% since the end of October.
This is despite the fact that all of its technology peers in technology and NASDAQ are moving higher, much higher.
On Nov. 5, Alibaba reported revenue growth of 30% year-over-year in the company’s fiscal second-quarter ending Sept. 30. It also had adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) up 28% year-over-year.
Moreover, its cloud computing division revenue grew 60% year-over-year. This division now comprises 9.6% of total revenue, up from 8.4% a year ago. Essentially digitalization has been accelerating across China and Alibaba is taking advantage of this development.
Moreover, Alibaba reported that its free cash flow grew 33% year-over-year.
Here is the bottom line. Analysts expect earnings to rise 21% to the year ending March 2022 to $12.44. That puts it on a very reasonable price-to-earnings multiple of just 21 times earnings.
Compare that to Amazon (NASDAQ:AMZN). I have shown in previous articles that Amazon has much lower free cash flow margins than Alibaba. However, Amazon trades at 90 times this year’s forecast earnings and 70 times 2021 EPS.
However, Amazon’s free cash flow grew just 25.5% over the last-12 months (LTM). So this is not completely a similar comparison with Alibaba, which had higher quarterly FCF growth on a year-over-year basis. But since the stock has such a huge multiple in terms of valuation, one would expect the growth to be much higher.
In other words, BABA stock is at a huge discount compared to its peers, despite similar growth and better margins.
Politics in the Way of Its Value
There is simply no question that the proposed law that the US Congress is looking to pass that will require audits of Chinese companies is weighing down Alibaba’s valuation.
On Dec. 2, the House passed the proposed law and the Senate passed it in May. Analysts expect President Trump to OK it as well.
Here is what is interesting. Chinese companies will have three years to pass U.S. inspections. If the Chinese government does not allow US regulators to perform audits on Chinese companies, an eventual showdown and delisting could occur.
But that would be at least three years in the future. For most institutional investors this won’t matter much, since they have the ability to sell their shares on foreign exchanges. I suspect there will easy ways to sell BABA ADRs (American Depository Receipts) as well even if they are not listed on U.S. exchanges.
For example, most depository banks are willing to exchange any owner’s ADRs into the underlying ordinary shares for a fee of about 5 cents per ADR. It turns out that anyone can do this simply by instructing their brokerage firm they want to own the foreign ordinary shares.
Then, 0nce the ordinary shares are put into the brokerage account they can be sold on another exchange, including ones in China. It just may cost a little more than if the shares were traded as ADRs on US exchanges.
I used to manage over $100 million in private wrap accounts where investors held ordinary shares. I found it preferable to own ordinary shares rather than ADRs. Market makers in U.S. exchanges often manipulated the U.S. dollar prices of foreign ordinary shares. In addition, bid-ask spreads were much worse than the underlying foreign stock spreads.
What to Do With 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.
Enterprising investors will see it this way and not worry about what exchange the stock ends up trading on. In the long run, it doesn’t really matter that much.
Certainly, most institutional investors will see it this way. They might actually prefer to buy and trade the shares on a foreign exchange rather than in the U.S. The key is getting a bargain price, and that is what BABA stock offers 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.