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Proprietary Data Insights Financial Pros’ Top Chinese Stock Searches in the Last Month
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Is Alibaba (BABA) Cheap Enough to Buy? |
China’s $17.8 trillion economy is second only to the U.S.’s $27.0 trillion. However, finding investment opportunities there isn’t easy. In recent years, the government has moved away from free markets, instead taking a heavy hand in control and regulation. This collapsed their markets, with the KranShares China Internet ETF (KWEB) losing almost 75% of its value since 2021. And that’s basically how much the once mighty Alibaba (BABA) has fallen, despite substantial revenue growth every year. It’s the top China stock searched by financial pros, according to our TrackStar data. They see it as an extreme value play, given the company trades at 7x cash and throws up revenue growth between 10%-20% most years. But, given the unfriendly regulatory environment, is that enough to make Alibaba worthy of an investment? Alibaba’s Business Alibaba is kind of like Amazon for China. Its two flagship platforms, Taobao and Tmall, each sell to retail customers. The difference is Taobao is C2C while Tmall is B2C. This makes up 46.3% of the company’s revenues. The rest is broken down as follows:
We view Alibaba as one of the more trustworthy Chinese companies with a history of presenting reliable financial data. However, it’s also directly in the crosshairs of its government, which has stopped the AntPay spinoff and continues to hammer the company over data sharing. Financials
Source: Stock Analysis Revenue growth slowed markedly in the last few quarters. Taoboao and Tmall sales were up 2% Year over Year for the quarter, but total sales were up just 5%. Earnings fell 68% during the same period as the company performed mark-to-market on equity holdings and impairment on Sun Art’s assets and Youku’s goodwill. That would explain why cash flow still increased YoY. Speaking of which, Alibaba generates an insane amount of cash – over $25 billion annually. The problem is that doesn’t get put back to shareholders. Total cash and short-term investments sits at a whopping $86 billion while ‘long-term investments’ hit $60 billion. Alibaba doesn’t pay dividends, but spends about $10 billion a year on share buybacks, which comes out to 5.35% yield. Valuation
Source: Seeking Alpha Chinese stocks are incredibly cheap. JD.Com (JD) trades at 5x cash and 10x forward earnings. Pinduoduo (PDD) trades at 13x cash while GigaCloud (GCT) trades at 12x cash. That’s all fine and well, if those numbers are accurate. Yet, even if they are, it doesn’t mean anything if profits aren’t returned to shareholders. Growth
Source: Seeking Alpha Alibaba’s growth has slowed in the last few years. And its forward outlook at 4% is pretty low, especially compared to other Chinese companies. Plus, its seen EPS and net income drop over the past few years. That’s largely because they stopped receiving about $10 billion a year in interest and investment income when the Chinese government put the kibosh on the Ant IPO. Profitability
Source: Seeking Alpha Alibaba still maintains some of the best profitability amongst Chinese companies, save for Pinduoduo. However, its inconsistent results have led to a tepid return on equity, assets, and total capital. Our Opinion 3/10 We can’t get behind a company with so much risk. Sure, it’s profitable. But shareholders never get a dime of that. China’s government has too much say in what the company can and cannot do. Until that changes, there just isn’t any reason to own Alibaba much less any Chinese company. |
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