Barron’s magazine seems a little conflicted. On the one hand, they produced a positive story about Alibaba (NYSE:BABA) on Oct. 10. It indicated that famed investor Charlie Munger was “doubling down” in investments in BABA stock through Daily Journal (NASDAQ:DJCO), of which he is the Chairman.
On the other hand, Barron’s wrote an opinion piece on Oct. 12 that said that even though Alibaba stock is rebounding it’s not time to invest in Alibaba. In other words, despite writing that Munger likes the stock, their advice is to avoid it.
They think the Chinese government could continue to crack down on the company in the future.
BABA Stock Seems Cheap Here
However, I have been recommending investing in Alibaba stock for a number of months. Last month I wrote that the company’s buybacks will act as a major catalyst. In fact, the stock seems to be recuperating.
One reason could be that analysts still see the company as extremely profitable. For example, at $163 per share (as of Oct. 12), BABA stock trades for just 17.4 times projected earnings for the year ending March 2022. And for March 2023, it’s at 10.9 times earnings.
This is according to Seeking Alpha. Yahoo! Finance, which uses Refinitiv analyst survey data, has similar earnings prospects. For example, their survey for March 2022 earnings-per-share (EPS) is $9.30 cents per share. Seeking Alpha indicates that the same 36 analysts have an average $9.34 cents EPS forecast.
This seems to be unusually cheap. For example, Amazon (NASDAQ:AMZN) trades for 3 times the price-to-earnings (P/E) multiples of BABA stock. It trades for 61.6 times December 2021 year-end earnings and 48.6 times 2023 forecast earnings.
Moreover, Alibaba’s price-to-sales (P/S) multiple is just 3.1 times for the year ending March 2022 and 2.6 times for 2023. This seems quite cheap. For example, Amazon is at 3.5 times 2022 sales and 2.93 times 2023 forecast sales.
Where Things Stand for Alibaba
At this point BABA stock seems to be near a trough. After having peaked at around $270 in mid-Feb. the stock seems to have reached a trough on Oct. 3 at $139.63. Since then it has drifted higher to $163 as of Oct. 12.
Alibaba’s second-quarter earnings release showed strong results. Its global ecosystem rose 45% from the prior quarter in terms of total consumers on its sites. The company’s net income attributable to its shareholders was up 10% year-over-year (YoY).
However, its free cash flow (FCF) was $3.2 billion, or $1.4 billion lower than last year, but that was due to a settlement it had to pay to the Chinese authorities. In effect, FCF, on an adjusted basis was $4.6 billion. That annualized to $18.4 billion. We can use this to value BABA stock.
What BABA Stock Is Worth
This $18.4 billion in annualized FCF represents good value. For example, compared to its market value of $465 billion, the FCF yield is high at 3.95% (i.e., $18.40 billion/$465 billion). This could easily fall to 3% or lower within the next year, pushing the stock higher.
Here’s how that works. Let’s say that the market starts to value the FCF more. They will push up the price and effectively lower the FCF yield. So if we divide $18.4 billion by 3%, the resulting target market cap is $613.33 billion. That represents a gain of 31.9% over today’s market value of $465 billion.
As a result, the target price of BABA stock should be 31.9% higher than today. Therefore, if we multiply $163 per share by 1.319, we get a target price of $215 per share.
What to Do With BABA Today
This implies that now might be a good time to copy what Munger is doing and “double down” on investment in BABA stock. Or, if you have not yet made a purchase, it might be a good time to consider doing so.
Analysts tend to agree with me. For example, Yahoo! Finance (using Refinitiv analyst survey data) shows that the average price of 47 analysts on BABA stock is $245.81.
Moreover, Seeking Alpha‘s average of 46 analysts is $249.07 per share. Both of these are higher than my forecast of $215 per share for the target price, as shown above.
So, the consensus, between my forecast and analysts, as well as Charlie Munger seems to be that BABA stock is a good buy here. Take that, Barron’s, and stew on it!
On the date of publication, Mark R. Hake did not hold, directly or indirectly, any position in any of the securities mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
