- Alibaba stock has underperformed the broader market indices over the last one year.
- The decline in Alibaba stock price was driven by macro fears even as fundamentals remained strong.
- With the growth story still intact, Alibaba stock presents an attractive opportunity at current price levels.
China has been in the news over the last one year for all the wrong reasons. With declines in macro indicators, the devaluation of the Yuan, and injection of huge amounts of funds into the Chinese economy, concerns regarding a slowdown in China seemed to have gripped global markets, sending all major indices lower over the last one year. The impact on Chinese stock markets and stocks of China-based companies was worse, with many of them significantly underperforming their market benchmarks. Alibaba, the poster child of the Chinese e-commerce revolution is a case in point.
Alibaba stock lost over 13% of its value in the last one year, significantly underperforming the broader markets, with the NASDAQ composite sliding by 3.5%. Even more concerning is the fact that Alibaba stock closed the last trading session (March 16) at a price of $73.5, which is 19% lower than its first-day post-IPO close on the NYSE.
Alibaba Fundamentals Remain Intact
The performance of Alibaba stock over the last one year might have raised questions in the minds of investors. However, before hitting the panic button, investors will be better off looking at the underlying numbers, which drove their decision to buy the stock in the first place.
Most major fundamental parameters of Alibaba have remained intact over the last one year even as the slowdown in China unfolded. Alibaba's major financial and operational parameters are summarized below.
|in millions of $||12 months ended Dec 2014||12 months ended Dec 2015||YoY growth|
|Adj. Net Income||5475.58||6761.33||23.5%|
Alibaba's operational metrics highlight the fact that Alibaba is clearly focussed on mobile, which is evident from its rapidly growing mobile GMV (Gross Merchandise Value).
|12 months ended Dec 2014||12 months ended Dec 2015||YoY growth|
|Total GMV ($ in Billions)||367.36||466.34||26.9%|
|Mobile GMV ($ in Billions)||130.55||278.61||113.4%|
|Mobile GMV/Total GMV||35.5%||59.7%||24.2%|
|Monthly Active buyers/Annual Active buyers||70.3%||88.1%||17.8%|
Another proof of Alibaba's successful transition into a mobile company is evident from the fact that the company's monetization on mobile is rapidly rising.
Alibaba Stock Valuation
Using a two-stage DCF valuation model, with a discounting rate of 15% and stable state growth rate of 2%, the current Alibaba stock price implies a 14% growth in free cash flow over the next 5 years. For a comparison, analysts project Alibaba earnings to grow at an average annual rate of 27.6% over the next 5 years and Alibaba has grown its LTM free cash flow at an impressive 70% YoY.
Running a scenario test on the above model using different values of the 5-year average annual growth rate leads to the following target Prices for Alibaba stock.
|5 Year average growth||Target price||Upside (from March 16 close)|
Looking at the historical performance of Alibaba as well as analyst expectations, free cash flow growth of 20% over the next 5 years shouldn't be too difficult for Alibaba as it rolls out its services across new geographies. Cloud computing, global expansion and continued growth of the Chinese e-commerce market will be some of the key growth drivers for Alibaba.
Share Buybacks Should Boost EPS growth
Alibaba growth will also be aided by the company 's share repurchase program plan unveiled in August 2015. The company has earmarked $4 Billion for buying back stock. In another encouraging move, Chairman Jack Ma and vice Chairman Tsai plan to spend $500 million of personal funds to participate in the huge buyback program.
The buyback program should boost reported EPS growth by reducing the number of shares. Alibaba stock has an average closing price of $83.3 (using historical price data from Amigobulls) since its IPO. Assuming that as the average buyback price, Alibaba should be able to buyback 48 million shares, leading to a 2% reduction in the float.
To sum up, Alibaba stock price (March 16 close) currently implies a growth rate of 14% for the next 5 years. This pales in comparison to Alibaba's historical growth rate as well as expected future growth. The much talked about slowdown in China has been a major cause for the depressed stock price. However, Alibaba fundamentals remain intact and Alibaba's growth story continues to remain strong. Alibaba stock looks set to continue its recent upward momentum and long-term investors convinced of Alibaba's growth potential should make use of this opportunity to buy Alibaba stock.