Over the last year, Alibaba (NYSE:BABA) has had a rough time and is up just a bit over 5%, as of May 25. In fact, year-to-date, BABA stock is down almost 10%, according to Seeking Alpha. Most of this drop occurred in the last quarter, despite stellar first-quarter results that were released on May 13.
Alibaba reported that its Q1 revenue rose 64% year-over-year (YoY) and that its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) grew 18%. That number is now $4.563 billion.
However, for the first time in its history, the company swung to a quarterly operating loss of $1.17 billion. However, this was due to a one-time fee of $2.11 billion penalty from the government of China.
Compared to its $572 billion market value, BABA stock now trades at just 3.9 times forward estimated sales for 2022, according to Seeking Alpha. In addition, its price-to-earnings (P/E) ratio is just 20.5 times.
Moreover, the company has a very compelling forward P/S ratio for 2022 and an attractive 2022 P/E multiple. Analysts expect $145 billion in sales next year and $175.75 billion in 2023, up 21% in 2023. That gives it a P/S multiple of just 3.25 times (i.e., $572 billion / $175.75 billion).
In addition, analysts foresee $12.79 in earnings per share (EPS) in 2023, up 24% from $10.29 predicted in 2022. This puts BABA stock on a forward 2023 P/E multiple of just 16.5 times at today’s price (May 25) of $211.73.
Compare this with Amazon (NASDAQ:AMZN). According to Yahoo! Finance, analysts estimate that next year the company will make EPS of $72.09, up 29%. At today’s price of $3,268, that puts AMZN stock on a forward P/E ratio of 45 times. That is 173% higher than Alibaba, implying that BABA stock is deeply undervalued.
You can’t really say that the difference in EPS growth rates is that great — 21% at Alibaba vs. 29% at Amazon. Therefore, this does not really account for the huge differential in the valuation parameters for BABA stock.
And that is the rub. Why is BABA stock so cheap? It probably boils down to the China issue. All things Chinese are not as popular in the U.S. anymore, especially in the markets.
In addition, Alibaba had some trouble in China. On April 10, they accepted a $2.8 billion antitrust fine from the State Administration for Market Regulation (SAMR) in the PRC. This is effectively a slap on the wrist, as the fine represents just 4% of its 2019 revenue.
Moreover, as the Financial Times points out, the company is now facing hardcore competition from e-commerce companies that are willing to run losses. The FT reported that Pinduoduo (NASDAQ:PDD) overtook Alibaba in annual shoppers at the end of last year. It did so by offering huge discounts that Alibaba was not willing to offer. The company is also battling Meituan in food delivery. It has decided to invest large amounts to compete against these loss-making peers.
But Alibaba is still growing. Its mobile MAUs (monthly active users) grew 2.55% to 925 million, as of March 2025. That works out to an annualized rate of 10.59%. Given the huge base that it is based on, that is a great feat. It essentially ensures that the company’s revenue will continue to show underlying growth.
What To Do With BABA Stock
I suspect that over time the stock will rise to a higher valuation metric. It’s likely that by next year, its forward P/E ratio could be well over 20 times, say 25 times. This would still put it well below the 45 times P/E ratio that Amazon has.
Therefore, 25 x $12.74 equals a price target of $318.50. That is 50% above its price today of $211.73. Even if it takes a year for that to happen, this ensures a very good return on investment (ROI) for most investors.
Analysts are starting to change their minds as well. Yahoo! Finance reports that 47 analysts now have an average price target of $297.41, or 40% higher than today’s price. In fact, 48 out of 49 analysts put the stock at buy or strong buy since its Q1 earnings release on May 13, according to Yahoo! Finance.
My best guess is that BABA stock is still at least 50% undervalued at $318.50. Long-term value investors in the company may find this prospect compelling.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
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