Alibaba Group Holding Limited (BABA) is the largest e-commerce retailer in China, with $134.54 billion trailing-12-month revenues. The company is ranked #63 on the Fortune Global 500 list.

The company came under fire in November 2020, just before the highly anticipated Ant IPO listing. It was one of the primary targets during the country’s regulatory crackdown on tech giants and had to pay a record $2.80 billion under antitrust fines. BABA’s shares have declined 66.34% since November 2020 to close yesterday’s trading session at $98.52.

Nonetheless, China seems to be easing its regulatory crackdown on tech stocks lately. On June 9, the government gave tentative approval for reviving BABA-backed Ant Group’s dual IPO listing in Shanghai and Hong Kong. Shares of BABA gained more than 24% between May 25 and June 8. 

Here’s what could shape BABA’s performance in the near term:

Mixed Growth Story

BABA’s revenues grew at CAGRs of 31.3% and 40.1% over the past three and five years, respectively. The company’s EBITDA increased at CAGRs of 10.9% and 16.3% over the past three years and five years, respectively.

In addition, BABA’s net income improved at a 7.3% CAGR over the past five years, while EPS improved at a 6% CAGR over this period. However, the company’s net income and EPS declined at a rate of 10.9% and 12%, respectively, per annum over the past three years. Also, its levered free cash flow declined at a rate of 15.3% per annum over the past three years.

BABA’s trailing-12-month revenues increased 18.9% year-over-year, while total assets increased 8% over this period. However, the company’s trailing-12-month EBITDA and net income declined 14.3% and 58.7% year-over-year, respectively. In addition, BABA’s trailing-12-month EPS fell 58.4% year-over-year, while levered free cash flow declined 69% year-over-year.

Mixed Profit Margins

BABA’s trailing-12-month gross profit margin of 36.76% is slightly higher than the industry average of 36.25%. Its trailing-12-month EBITDA and net income margins of 15.74% and 7.3% are significantly higher than industry averages of 12.11% and 6.56%, respectively. In addition, the company’s trailing-12-month levered free cash flow margin of 6.78% is 96.5% higher than the industry average of 3.45%.

However, BABA’s trailing-12-month ROE, ROTC, and ROA of 6.57%, 4.73%, and 3.67% compare with industry averages of 17.15%, 7.38%, and 5.63%, respectively. Moreover, its trailing-12-month asset turnover ratio of 0.5% is 51.1% lower than the industry average of 1.03%.

Stretched Valuation

In terms of forward non-GAAP P/E, BABA is currently trading at 13.31x, 17.5% higher than the industry average of 11.33. The stock’s forward Price/Sales multiple of 1.90 is 124.6% higher than the industry average of 0.85. In addition, its forward EV/EBITDA and EV/Sales ratios of 11.04 and 1.94 compare with industry averages of 8.46 and 1.07, respectively.

Also, BABA is currently trading at 8.79 times its forward cash flows, 7.5% higher than the industry average of 8.18x.

Consensus Rating and Price Target Indicate Potential Upside

Of the 19 Wall Street analysts that rated BABA, 17 rated it Buy, while two rated it Hold. The 12-month median price target of $159.84 indicates a 62.2% potential upside from yesterday’s closing price of $98.52. The price targets range from a low of $115.00 to a high of $276.00.

POWR Ratings Depict Uncertainty

BABA has an overall rating of C, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

BABA has a grade of C for Momentum, Quality, and Growth. The stock is currently trading slightly below its 50-day and 200-day moving averages of $95.13 and $125.27, respectively, in sync with the Momentum grade. Moreover, BABA’s mixed profit margins and growth story justify the Quality and Growth grades, respectively.

Of the 41 stocks in the F-rated China group, BABA is ranked #24.

Beyond what I’ve stated above, view BABA ratings for Sentiment, Stability, and Value here.

Bottom Line

Despite the easing government regulations, BABA-backed Ant Financial Services Group has no plans to revive its IPO listing, according to a spokesperson for the company. Shares of BABA plummeted 16.5% since this news release on June 9. Moreover, with slowing e-commerce sales globally, BABA’s profit margins have been declining over the past few quarters. Thus, investors should wait until BABA stabilizes before investing in the stock.

How Does Alibaba Group Holding (BABA) Stack Up Against its Peers?

While BABA has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, NetEase Inc. (NTES), FinVolution Group (FINV), and China Automotive Systems, Inc. (CAAS), which have a B (Buy) rating.

BABA shares were trading at $104.85 per share on Tuesday morning, up $6.33 (+6.43%). Year-to-date, BABA has declined -11.73%, versus a -20.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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