- Alibaba stock shows good signs in terms of profitability and earnings growth.
- Technical analysis shows that Alibaba stock is in an uptrend.
- Is it the right time to buy Alibaba stock?
Alibaba Stock Fundamental Analysis
Alibaba (NYSE:BABA) stock is now trading at $94.99, with a P/E ratio of 50.51 and a 52-week range of $59.25-$109.87. Alibaba stock has returned around 57% since mid-February and is currently trading at a market capitalization of $237.47 billion. So, what are the growth prospects now? And what are the market risks from a possible tariff on Chinese imported products, which was promised by the newly elected US President Donald Trump? Let's have a look at some crucial fundamentals to answer those questions.
1. Revenues and earnings growth:
Alibaba revenues grew by 32.73% in FY 2016, to 14.93B, as compared to FY 2015. Net income grew 194.55% to 10.55 billion. Also, there has been an increase in both revenues and net income for the most part of the recent quarter as well. An increase in revenues and net income for last 4 fiscal years is a driving factor for sustainable profitability and appreciation of the share price.
2. Financial leverage and solvency ratios :
Alibaba has lower debt/equity and leverage ratios than its industry which is a positive. Also, current ratio and quick ratio for the stock are both higher than the ratios of the industry showing management effectiveness. Debt/Equity ratio is currently at 0.34 and the total current assets are more than double the total current liabilities showing a strong balance sheet. Investing in a company with moderate financial leverage and with good solvency ratios shows safety over the long term, which is a desirable investing characteristic. (Also read: Should You Buy Alibaba Stock After Trump's Win?)
In the last 4 fiscal years, both total revenues and net income have been growing. Last year revenues increased by 32.73% while net income grew by 194.55%. This presents a good picture as it shows consistency. Also, the expected EPS growth for next 3-5 years is about 26.75%.
Return on equity is currently at 23.60% which is good enough for a growth stock. Profitability is another very important factor that can actually lead to a higher stock price both in the short-term and long-term horizon, making Alibaba stock both a swing trading potential candidate and a long-term investment.
Both gross and net profit margins for Alibaba are higher than the profit margins of its industry. Especially current net profit margin of 26.31% is 6 times higher that the industry margin. Having higher profit margins than the industry shows that Alibaba has a strong competitive advantage, which can attract more capital inflows in the near future if it is can sustain them.
4. Free Cash Flow:
Free Cash Flow has been positive and increasing for the last 4 years. Free cash flow grew by 37.48% YoY in 2016. Free Cash Flow being positive is extremely important as it shows that the company has cash to use for various investing purposes, without causing any issues to its business operations.
5. Relative valuation analysis:
Current P/E Ratio of Alibaba stock is 50.51, which is higher than the industry P/E ratio of 48.54. Also, P/B ratio of Alibaba stock is lower than its industry. But there is a mixed analysis as both P/S ratio and P/CF ratio for the stock are much higher than the industry. Ideally, we would like all the 4 ratios for the stock to be lower than its comparable industry. The PEG ratio is currently at 1.23. It is a mixed overall picture when we perform this relative valuation analysis. Some ratios show Alibaba's stock price to be cheap compared to the industry where it belongs. (Also Read: How Safe Is Your Investment In Alibaba Stock?)
Alibaba stock shows good signs overall, in terms of profitability and earnings growth with sound leverage ratio. EPS growth for next 3-5 years is estimated at 26.25%. But as it has made an impressive rally this year caution is needed. With Alibaba stock currently trading at around $95, buying the stock at current levels could yield an investor a return of 20%, if Alibaba hits its 12 month target price of $115 per share.
Technical analysis shows that the stochastics indicator is at oversold levels and the 200 MA is in an uptrend, at 84.46 indicating a long uptrend. Combining fundamental analysis and technical analysis we can point out a strong argument that the stock still has the potential to reach new heights, with the first target at the resistance level of $110 per share. The market risk of a potential tariff which could be imposed on Chinese goods is very big and important, but for now, it is only a speculation and a promise, not a real fact.
Disclosure : Sources used are MSN money and Zacks.com