Delisting Threat Creates Opportunity

Proprietary Data Insights

Financial Pros Top E-Commerce Searches In The Last Month

0 1 2
Rank Name Searches
#1 Amazon 10,737
#2 Alibaba Group 4,877
#3 Shopify 1,907
#4 eBay 234
#5 Etsy 201

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Delisting Threat Creates Opportunity

Most big tech companies don’t trade at 12.1x adjusted earnings and 1.8x sales. Let alone, 11x its operating cash flow. However, that’s exactly the case with Alibaba (BABA). 

That’s probably why it’s the second most searched e-commerce stock by financial pros behind Amazon.

And that interest has grown in recent months.

You see, US regulators have been threatening to delist Chinese companies because of the lack of transparency in their accounting . That’s why BABA’s shares have gotten rocked over the last 52-weeks. 

However, it’s set to receive an audit soon, and if it passes, it could send the stock soaring. Plus, the U.S. and China have come to preliminary terms related to ongoing audits into the future.

Is now a good time to invest in BABA, or is the risk too high?

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Alibaba Group’s Business 

Alibaba Group (BABA) is the largest e-commerce player in China. In March this year, the firm announced it had reached over 1 billion active consumers. BABA owns Alibaba.com, Taobao.com, Tmail.com, Juhausan.com, and Alixpress.com, to name a few. In addition, it owns Alipay.com, an online payment platform. The company breaks its business into the following segments: China Commerce, International Commerce, Local Consumer Services, Cainiao, Cloud, Data Centers and Hardware, Platform-as-a-Service and other solutions, Digital Media, and Entertainment. 

Financial Statement

67% of the company’s revenues are from its China commerce segment. 

Financials

Financial Statement

From 2016 to 2021, BABA grew its revenues from 158 billion RMB to 853 billion RMB, representing a growth of more than 4x. Its 12-month trailing revenues are 852 billion RMB. 

Quick note, BABA reports its earnings in Chinese Yuan. 1 US dollar is approximately 6.98 Chinese Yuan. 

BABA has 463 billion RMB in total cash and total debt of 174.8 billion RMB. Its current ratio of 1.7x implies that it is financially strong, with more than enough cash to cover its short-term liabilities. 

Valuation

 Financial Statement

BABA trades at a 39.6x P/E GAAP ratio, notably higher than its five-year average of 33.6x. 

However, compared to other companies in the e-commerce space, Alibaba’s P/E of 39.6x is not bad. For example, AMZN trades at a P/E GAAP ratio of 109.6x. Meanwhile, Shopify (SHOP), JD.com (JD), and eBay (EBAY) aren’t even profitable enough to have a P/E GAAP ratio. 

Profitability

 

Financial Statement

BABA has excellent gross profit margins at 36%. 

It’s superior to its Chinese rival, JD, who has a gross profit margin at 7.5%, and not far from AMZN at 42.6%. 

While SHOP and EBAY both have larger gross profit margins than BABA, they don’t operate at the same scale. Furthermore, BABA beats AMZN, SHOP, and JD, with its EBITA Margin of 15.9%.

Growth

Financial Statement

BABA hase 10.87% revenue growth (YoY), which is notably better than AMZN and EBAY. However, it’s not as rapid as SHOP at 29.8% or JD at 17.11%.

Our Opinion  6/10

If BABA was a US-based company it would be an easy buy at these levels, as it’s one of the best companies in the world. 

However, it’s a Chinese ADR, which makes it a risky bet. Chinese companies have been under scrutiny lately because of the way they report earnings. 

In fact, US auditors are set to arrive in Hong Kong to audit BABA. 

Companies that don’t meet the standard are at high risk of being delisted. If it passes its audit, expect the stock to have a nice pop, and make BABA investable. But until then, it’s best to wait.

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