Alibaba had a triple whammy yesterday as the company missed on both the top and bottom line and also lowered their forward guidance.
That said, Alibaba is still expected to grow revenues and EPS by 20%+ per year for the next few years.
Even though regulatory issues still remain, the valuation profile is extremely attractive at current prices.
Is it time to back up the truck?
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Nikada/E+ via Getty Images Introduction
Alibaba Group ( BABA ) gave shareholders the ol’ triple whammy when it reported earnings yesterday. Not only did they miss estimates on the top and bottom line, they also lowered guidance for the full fiscal year (which ends in March 2022).
That said, the more I dug into the report…the better I felt about the stock (even though it got spanked by another 11% yesterday).
Despite all the negativity around earnings (which quite frankly was probably exacerbated by the continued regulatory uncertainty), I honestly feel like the glass is still half full here.
Let me highlight some specifics and maybe you will feel the same way.
First, let’s start with a big positive…annual active consumers grew 29% in the quarter! This is probably one of the most important metrics for the company as it continues to expand its services outside of its core e-commerce business. It proves that Alibaba’s economic moat and brand remain strong with Chinese consumers.
Now for the ugly…
The earnings miss and lowered guidance suggest that competition is certainly increasing as Chinese regulators push through their anti-monopoly policies. Not to mention a general slowdown in economic growth and supply chain issues.
All that said, the truth of the matter is that Alibaba’s lowered expectations for growth in fiscal 2022 are still extremely attractive from an investment perspective. Note that the company now expects revenues to grow 20%-23% in 2020 (vs. the prior forecast of 28%-29%).
Don’t get me wrong, 29% growth would be great…but I will be just fine with 20% growth with the stock trading at 13x forward earnings!
It’s tough to find that combination of growth and valuation in the market today (please DM if you do find it elsewhere)!
Bottom line is that I feel like the risk/reward profile with BABA stock is very attractive after the sell-off. Even with the increased competition and regulations, Alibaba continues to have the consumers’ attention (and full access to their wallets).
In the video below, we break down the whole trade analysis for you (listen to this first as the commentary is a great introduction for the rest of the article). Alibaba Group Holdings Ltd. Sector/Industry: Consumer Cyclical / Internet RetailAlibaba is the world’s largest online and mobile commerce company (i.e., the Amazon ( AMZN ) of China). Source: Option Income Advisor Alibaba currently ranks above average for 2 of our 3 key long-term ranking measures: Dividend (N/A), Safety (10), Value (9). Note that our rankings are from 1 (lowest) to 10 (highest). Dividend Alibaba does not currently pay a dividend, but it has the potential to be an income-generating machine that you can use to manufacture your own high-yield “dividends” using cash-secured puts and covered calls. Safety Alibaba’s historical sales and EPS growth charts have always been a thing of beauty (hence the Safety Rating of 10)!Although the company lowered its forward guidance yesterday (and future projected growth rates), Alibaba is still expected to earn $8.50 per share in fiscal 2022. However, BABA expects earnings to grow even further in 2023 and 2024 to $10.44 per share (23% growth) and $12.54 per share (20% growth), respectively. Note that BABA’s fiscal year end is March. Source: Option Income Advisor Valuation/Upside Potential Alibaba looks extremely attractive from a valuation standpoint and is currently trading at a decent discount to all of its long-term valuation metrics (hence the high Value Ranking of 9). Source: Option Income Advisor Specifically, Alibaba is trading at a huge discount to its historical P/E multiple on a forward basis (13.3x 2023 earnings).That said, as regulatory concerns decrease over time, we definitely think there could be some room for margin expansion in the future.If you put just an 18x-20x multiple on consensus forward earnings of even a reduced $10.00 per share in 2023, that would equate to a $180.00 – $200.00 stock price (representing 25%-40% upside from current levels)!To put the current valuation in perspective…when BABA last traded in the $140 range back in October 2018, its annual sales […]