Alibaba Group Holding Ltd - ADR

NYSE:BABA   4:00:00 PM EDT
+2.70 (+3.33%)
4:30:31 PM EDT: $83.91 +0.21 (+0.25%)
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Why Now May Be Time to Buy Alibaba


Alibaba stock is collapsing to new all-time lows. The weakness (for the most part) surrounds the systematic risk of the Chinese equity market rather than anything company specific. China's stock market is down nearly 30% since the middle of June surrounding concerns of a slowing economy, a debt bubble and a stock market bubble. The concerns fall squarely on the Chinese consumer and their financial health.

Technicals   |   Support: Stock is Through Support   |   Resistance: 85.68   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

BABA has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.

The bearish thesis for BABA is rather simple: The Chinese economy is slowing, the stock market has been a bubble, the real estate market and its ghost cities are a bubble, debt is erupting, and the government is now essentially trying to make it impossible for a correction by getting 21 of the largest brokers to buy stock in large caps amounting to over $200 billion yuan. For all intents and purposes this is the bearish argument that has been screamed from the hill sides for five years and may very well be correct.

A reckoning may be coming for China. I wrote about it in July of 2012 and even called it the "Chinese Apocalypse and deflationary vortex." What can I say, I get excited sometimes and like to use big words.

But, China has not collapsed; there has been no deflationary vortex and certainly no apocalyptic economic event. The Chinese economy is growing faster than any of the top ten, even though the growth is slowing. The bullish thesis for Alibaba is simple: BABA stock is diving due to systematic risk; risk that has been overstated time and time again. When looking at the company's fundamentals they are quite strong and BABA's business model is novel, and essentially just better than everyone else’s both inside and outside of China.

Alibaba is quite different from its most commonly named competitors ( Inc. and, Inc). While most on-line retailers house their own inventory, for the most part BABA doesn't do that at all. Instead it acts as a platform for other retailers to reach BABA's immense customer base. In the charts below, I will show you some things you likely have never seen before and are absolutely breathtaking.

As a business model, this has proven to lead to absolutely enormous earnings margins (stunning chart below). While BABA has ~1/10th the revenue of AMZN, it generates more than ~10x the earnings. BABA's largest obstacle is sales growth outside of China.

BABA just recently announced that will be launching a sort of Netflix / HBO competitive product inside China. Expansion into China with a wider array of products may make a much more bullish and compelling argument than a huge spend to make a business model outside of China. Don't get me wrong, BABA does not have to be isolated to China, but the fact that management has not lost focus on where it actually makes money is quite promising for the firm.

Here are the earnings estimates for next quarter for BABA.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-12 $0.43 $3,393.9 M $3,384.0 M $2,810.7 M Provided by ZACKS

These are the core fundamentals that are driving BABA's star rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 12,292 8,446

Operating Margin (QTR) 1.175 1.83 2.05 FALLING

Net Income (TTM US$ Millions) 3,913 3,750 RISING

Levered Free Cash Flow (TTM US$ Millions) 6,533

Research and Development (US$ Millions) 491 193 137 RISING

Research and Development Expense/Revenue 0.175 0.100 0.098 RISING

Stock Returns and Chart

BABA is down -3.6% over the last three months and down -23.6% over the last six months.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).

Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 12,2928,446

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters, which is essentially all of BABA's existence as a public company.

Note that BABA is growing revenue by 45.54% year-over-year. Again, the question is about growth from here forward. Some will have to come from outside of China, but it appears the firm still has room to grow inside China with new offerings.

What do all these numbers mean?
BABA's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up-trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Revenue (TTM US$ Millions) Peer Chart

Let's look at Revenue (TTM) for BABA versus its peers (AMZN, JD) in the chart below. Note how little BABA's revenue is to AMZN based on its "platform" based business model. Then wait until the next two charts.

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While revneue is dominated by AMZN, check out these two images. The first is BABA's net income vs AMZN and JD on the y-axis, with revenue (ttm) on the x-axis.

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This is an insane image. BABA earnings tower above JD and AMZN while the other two firms have 2x-10x the revenue. This is the clearest image and demonstration of the different business models.

The next chart plots all of mega cap technology equal spaced on the x-axis (rank) and the net income margin % on the y-axis.

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BABA not only dominates the on-line retail space with respect to earnings margins, but it actually dominates all of technology. Now there's a fact (and chart) we rarely see.

Net Income (TTM US$ Millions) 3,9133,750RISING

Net Income (after tax profit) over the trailing twelve months (TTM) for BABA is in fact rising but if we back away from a four-quarter comparison, we can actually see falling earnings. For the most recent trailing-twelve-months (TTM) the company reported net income of $3,913 (million). That's an increase in the most recent year from $3,750 (million) or a 4.35% change but is down from the peak three quarters ago of over $5 billion.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).

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Levered Free Cash Flow (TTM US$ Millions) 6,533

Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For BABA the current value reported by the company is over $6.5 billion. The limited data gives us less information than for most companies to really understand the trends in the fundamentals, but whatever the case, the firm is generating HUGE cash flow.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.

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BABA has the largest net income margin % of all of large cap technology, not to speak of its dominance in the retail space. The question has always been about growth outside of China. BABA's management knows the tough road to grow outside of home base, and I think there's a compelling thesis building around the firm's continued revenue growth within china with new offerings.

If BABA does grow outside of the US, keep in mind those earnings margins. A little bit of revenue makes "a lot a bit" of earnings.

That's the bullish thesis again. Let us not forget the scary bearish thesis surrounding an overwhelming and unshakable economic downturn in China and the Chinese consumer. If the bearish thesis feels overdone, then perhaps BABA's stock decline makes it an attractive opportunity.