Alibaba (NASDAQ:BABA) announced on Feb. 11, that it will release its fiscal Q3 results for the quarter ending December before the market opens on Thursday, Feb. 24. Investors expect to see extraordinary profits and even some fireworks in BABA stock after this.
This is because many investors now say that BABA stock looks very cheap. There are a number of articles in Seeking Alpha saying this, as well as on InvestorPlace.
Certainly, the stock has fallen to the point where even a casual observer might say this could be a bargain.
From a peak of $317.15 in Nov. 2020, it consistently fell all throughout 2021. For the whole year, it was down 49% ending at $118.79 on Dec. 31, 2021.
But ever since then, BABA stock has more or less tread water. As of Feb. 14, it closed at $121.82, so it is actually up slightly for the year-to-date (YTD) period.
What To Expect With Alibaba’s Results
As it stands, analysts now forecast that revenue for the quarter will hit $38.73 billion. This is after it made $31.43 billion in sales last quarter and $33.63 billion last year.
So this implies that revenue will jump 13.11% YoY, according to analysts surveyed by Seeking Alpha.
Moreover, earnings per share (EPS) are forecast to reach $1.71 per share on a GAAP basis, and $2.54 on a normalized basis, compared to $3.35 a year ago. So this implies that EPS will be lower on a year-over-year (YoY) basis.
One key difference this year is that its cloud revenue is expected to be a significant contributor to the company’s overall revenue picture. The cloud data market is growing very quickly in China. This is where Alibaba makes most of its cloud revenue (not too many Western companies trust the Chinese in cloud data services yet).
Part of the downturn in the last year has been its price cuts in its consumer lines, given the downturn in the Chinese economy. Analysts will be looking to see if there are indications this is abating.
Where This Leaves BABA Stock Now
As it stands now, Alibaba now has a market capitalization of $339.5 billion. However, as of Sept. 30, it had cash, cash equivalents, and short-term investments equal to $68.8 billion. This represents 20.3% of its market valuation.
Moreover, assuming it generated positive free cash flow (FCF), that cash balance could be higher by December. For example, it produced $3.45 billion in FCF last quarter.
Typically, Alibaba has been very shareholder-friendly. Last quarter the company bought back $5.15 billion of its shares. This works out to 1.51% of its market cap, or a 6.4% annualized buyback yield. This is a very good use of its free cash flow on behalf of shareholders. Investors will be watching to see if the company did the same thing this past quarter.
The Bottom Line
Given how far down the stock has come, it now trades for just 2.4 times estimates of March 2022 year-end revenue and 2.0x fiscal 2023 revenue estimates.
But more importantly, assuming Alibaba is on track to make $8.30, in EPS for this year (ending March 2022), it puts BABA stock on an incredibly cheap P/E ratio. At today’s price of $121.92, this puts it on a forward P/E of just 14.9x.
Moreover, taking analysts’ estimates of $9.22 for next year, the forward P/E is just 13.4 times. This is very cheap compared to any of its U.S. tech company counterparts.
Of course, the market is adjusting for a huge “China discount.” This means that the company could at any time delist its stock from the NYSE or the US government might require this — should relations and regulations require it.
However, U.S. investors would still own shares. They would just trade in another location, so that is not as huge risk as it might seem. At today’s price BABA stock looks like a good bargain, especially if its fiscal Q3 numbers come in as forecast.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this 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 Newsbreak.com and runs the Total Yield Value Guide which you can review here.