- Alibaba shares are down, but holding up relatively well given the collapse of Chinese stocks.
- Alibaba is a well-run company but the present valuation is unrealistic.
- Expect a hard fall in Alibaba stock price after the next earnings release.
Back in September I wrote a piece called “Why I Would Rather Own Amazon than Alibaba”.
This was around the peak of Alibaba mania. No one wanted to hear it. Since then, Alibaba (NYSE:BABA) is down 14%, while Amazon.com (NASDAQ:AMZN) stock is up 35%. I don’t expect Amazon to experience similar gains over the next year, as it’s trading at nearly 2.4 times its trailing year’s revenues, but Alibaba is in deep, deep trouble.
Last year, when Chairman Jack Ma came to America, with his Buffett-esque Straight Talk and love of “Forrest Gump,” he was treated as a rock star. This time, with his invitation for Americans to invest in China, he was treated more like the salesman he is.
What changed in the meantime was China. China has just gone through the kind of boom-and-bust cycle in its stock market that older Americans recognize from their early history, and which they saw repeated in 2008, after the reforms of the New Deal era were repealed.
While China was booming-and-busting Alibaba was merely drifting downward. Alibaba stock price is down 23% for 2015, despite reporting March sales that were 45% ahead of those a year ago. The stock bounced off an early morning low Tuesday, and seemed to be doing the same thing Wednesday, buoyed by optimistic media reports.
Is this Faint Movement Justified?
Right now Alibaba is worth $200 billion, just short of Amazon.com’s $206.5 billion. This is despite the fact that its sales are tiny next to those of Amazon. They were reported in the Chinese currency, i.e. Yuan, for the March quarter at 17.425 billion Yuan. You need to divide that by at least 6 to get the equivalent in dollars. The actual Chinese Yuan to USD exchange rate is 6.2, and while for years Americans thought that was deliberately being manipulated higher by China's government, it may need to go up, at least in the near term, to deal with the stock market’s problems. Anyway, 17.45 divided by 6.2 comes to about $2.8 billion. Sales for all of 2014 came to $12.2 billion.
Thinking Alibaba will do $20 billion this year is wildly optimistic, but let’s be crazy for a moment. That means Alibaba is presently valued at nearly 10 times sales, four times Amazon. Oh yes, Alibaba gets a handsome profit margin of 25% from not having to buy what it sells, while Amazon warehouses its own merchandise, and runs at break-even. Even in this highly optimistic scenario you’re looking at a 2015 Price/Earnings multiple of 40 – it is almost 50 based on last year’s numbers.
In the face of a faltering economy, and a cratering stock market, the Chinese Yuan is not going to do better against the dollar, it’s going to do worse, hurting the translation of Alibaba’s numbers into dollars. In the face of a faltering economy, and falling Chinese stock investors, a lot of the new millionaires at Alibaba are going to have to sell their shares, and consumer growth is going to become hard to come by. When Alibaba next reports earnings on August 12, 26 analysts following the BABA stock expect earnings of 59 cents per share. Out of 45 analysts with ratings on the stock, 37 have it at buy, 5 at overweight.
I suspect it more likely that after its next earnings report it is Alibaba stock that may be taken out and shot, crashing to match a falling Chinese consumer sector. I don’t blame Jack Ma, or his management team. China is just a “Ragtime” economy in the age of Taylor Swift.
At some point, Alibaba “stock” will become a bargain. But that day is long off.