If you bought Alibaba (NYSE:BABA) stock on Nov. 23, 2020, six months later, your purchase of BABA stock isn’t looking so great, down around 26%.
Those who’ve followed Alibaba since it went public in September 2014 are probably aware it’s gone through periods of underperformance over the past six-and-a-half years.
To put it bluntly, BABA stock has sucked large in recent months. By comparison, the S&P 500 is up more than 19% in the same period.
Extenuating circumstances — the Chinese government crackdown — have played a large part in the e-commerce company’s lagging performance. Eventually, I see it getting its mojo back.
Should you buy at current prices? If history repeats itself, I believe you should. Here’s why.
A Closer Look at BABA Stock
I first wrote about Alibaba shortly after its initial public offering (IPO) in September 2014. In the article, I discussed the two IPO-related ETFs that fast-tracked the stock for inclusion in their funds.
Since my article was published, the Renaissance IPO ETF (NYSEARCA:IPO) and First Trust US IPO Equity Opportunities ETF (NYSEARCA:FPX) are up 174% and 156%, respectively. Over the same period, BABA is up 160%, right between the two ETFs.
Looking at the charts of both ETFs, I’m not sure the comparisons with Alibaba would have been much different six months ago before the e-commerce company began its current slide.
The important thing to note is that BABA has underperformed for lengthy periods before. This recent bout isn’t unusual.
Shortly after going public at $68 in 2014, it jumped up above $114 that November. It proceeded to fall below its IPO price approximately one year to the day after going public. It didn’t see triple digits again until September 2016.
In January 2018, after an extended run past $200, it proceeded to lose 35% of its value, closing out 2018 below $140. Over the next year, it clawed its way back into the $200s before falling back during the March 2020 correction. From there, it went on a big run that took it to $300 before falling back once more over the past six months.
For those who bought in June 2018 at over $200, you’re sitting on almost zero gains over a nearly three-year hold. If you’ve got excess cash in your portfolio, here’s why you might consider buying more.
Alibaba Is Worth Much More
It’s been a couple of weeks since the Chinese government’s State Administration for Market Regulation (SAMR) slapped Alibaba with a $2.8 billion antitrust fine. For the next three years, it will have to submit an annual self-assessment and compliance report to SAMR.
As the company pointed out in its press release detailing its fine, the dollar amount represents 4% of its annual revenue. In the trailing 12 months (TTM), Alibaba generated 164.4 billion Chinese Yuan ($25.3 billion) in free cash flow (FCF). The fine represents 11% of its TTM FCF.
So, it’s a big deal, but not backbreaking, given it grew its FCF by 23% in its third quarter ended Dec. 31, 2020.
Put another way, Alibaba has an FCF yield of 4.1% [$25.3 billion TTM FCF divided by $620.5 million market capitalization]. In comparison, Amazon’s FCF yield is just 1.6% [$25.9 billion TTM FCF divided by $1.67 trillion market cap].
Hake finishes his article by stating that BABA stock looks to have an intrinsic value of almost $346 or about 50% higher than where it’s currently trading. Cut the intrinsic value by 25% because of the regulatory risk that’s still present, and you have almost 15% upside.
In my opinion, the Chinese government would be nuts to kill Alibaba’s growth at this point. It’s an example of the country’s innovation and ambitions. Keep an eye on its domination but don’t kill the goose that laid the golden egg in the process.
Am I 100% bullish at this point? No, I am not.
Do I think it will trade above $300 within the next 12-18 months? I definitely do.
Should you buy a full position at $229? I would say yes.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.