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Alibaba: At The Center Of The Storm (NYSE:BABA)

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Alibaba (BABA) is one of the few companies that was not much affected by the crash of the market in March. And this fact makes it particularly interesting to analyze the future prospects of the company.

1. Technical parameters

The long-term price dynamics of a public company’s stock very often follow an exponential trend. And in this respect, Alibaba is no exception:

BABA long-term trend

Now, the actual price of Alibaba shares is about one standard deviation below this trend:

I want to note that similar things happened at the end of 2018 and in the middle of 2019. In both cases, the company subsequently caught up with its trend:

Alibaba history of deviations from trend

The rolling monthly total price return and the rolling annual total price return are both within the standard deviation:

Technically, we should note that Alibaba modestly reacted to the market crash in March. I regard this as a positive sign.

2. Growth drivers

When it comes to talk about Alibaba’s valuation, I select four key dependencies which allow us to judge how balanced the current capitalization of the company is.

The long-term relationship between the revenue TTM absolute size and Alibaba’s capitalization describes the company’s current price as perfectly balanced:

The long-term relationship between the revenue TTM absolute size and Alibaba

The same is true for the long-term relationship between the EPS TTM absolute size and Alibaba’s capitalization:

the long-term relationship between the EPS TTM absolute size and BABA

Considering the long-term relationship between the FCF TTM absolute size and the company’s capitalization, Alibaba is even slightly undervalued:

the long-term relationship between the FCF TTM absolute size and the BABA

In the case of Alibaba, there is also an emerging relationship between the FCF TTM growth rate and the company’s capitalization, which is reflected in the EV/FCF multiple. As demonstrated by the following chart, the current growth rate of this indicator justifies the higher level of the company’s capitalization:

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relationship between the FCF TTM growth rate and BABA

In terms of well-established relationships, BABA’s current price is classified as balanced or even slightly undervalued.

3. Comparable valuation

Judging by the P/S (forward) multiple, Alibaba is overvalued by 22%:

At first glance, such a comparison may not seem correct. But judging by the history of the last two years, this multiple serves as a good indicator of the balanced level, to which the actual share price has a tendency to return:

Comparing BABA through the P/E (forward) multiple, we obtain almost the same result:

This means that the average analysts’ expectations of Alibaba’s performance have deteriorated significantly in comparison to the performance expectations of other companies in my sample. Perhaps this is only a temporary phenomenon.

It is interesting that comparing BABA through such a fundamental multiple as P/BV, we see that the company is highly undervalued. But the result of this comparison has a long-term nature.

4. Sentiments

Now it is impossible to consider financial markets outside of the situation with the COVID-19 pandemic. And here, we find an obvious positive factor for BABA.

Here’s how the number of infected people is growing in China (log y-axis):

And this is Japan:


The U.S.:

Obviously, if we can say that the peak of the epidemic has passed, that is only in the case of China. And most likely, for example, the United States is only at the very beginning of the journey:

Source: Bloomberg

This leads to the fact that business activity in China is improving. Which cannot be said about the rest of the world:

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Source: Bloomberg

China was the first to face the epidemic and the first to curb it. This is Alibaba’s trump card.

Bottom line

Now, many are wondering if there will be a second wave of market decline. I think that will be the case. But I believe that Alibaba’s capitalization will not be affected much.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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