Is Alibaba Stock Overvalued?

Alibaba Group Holding Ltd (NYSE:BABA) is one of the largest companies in the world, however you choose to measure it.

Its 2019 sales of $70.6 billion pale in comparison to rival Amazon’s $296.3 billion, but it generated over twice the profit from them with equivalent assets.

Although it’s often cited as competition for Amazon, a growing U.S.-China trade war and heavy reliance on Chinese consumers has some analysts wondering: is Alibaba stock overvalued?

This guide will explore the company’s financials, how it responded to the coronavirus pandemic, and its place in the geopolitical climate of the 2020s.

CEO Daniel Zhang is in charge of the conglomerate Jack Ma built with a lot of correlations to the U.S. company built by Jeff Bezos. Let’s dive into what tricks Alibaba has up its sleeves to fulfill its customers’ and investors’ wishes.

Why Alibaba Stock Went Up

Although it’s been around since 1999, Alibaba only began trading on U.S. markets in late 2014. Even with the pandemic shutdowns, stock prices are still up about 400 percent since its IPO price of $68.

In fact, COVID-19 barely put a dent in the stock’s growth. Its heavy reliance on ecommerce became a strength as consumer sentiment shifted amid the outbreak. It also did well with its investment branch, owning companies like Youku Tudou, Alilbaba Pictures Group, South China Morning Post, and Lazada Group.

The company does face criticisms for being based in China, and U.S. President Donald Trump could target the company after his public battle against TikTok, owned by rival ByteDance.

In fact, Tencent (another Chinese rival) is also feeling heat, and all three companies are focused on the Southeast Asia market while considering a pull back from the U.S. We’ll dive into the political issues more below.

Still, the company is raking in money, from payment processing through Alipay (owned by Ant, which Alibaba has a massive stake in) to selling bulk wholesale goods, helping other businesses reach customers, and feeding a constant stream of content to keep its existing fanbase. The company’s moves seem to be working, as the market it’s serving has a thirst for all things digital.

Alibaba Financials

Alibaba’s financial reports for the second quarter of 2020 shows 34 percent growth in year-over-year revenue.

Its cloud computing revenue grew 58 percent, while active users are at 742 million. This gave the company nearly $6.7 billion USD in revenue for the quarter. And although spending on product development increased, it represents a smaller portion of revenue, as do sales, marketing, and other expenses.

The core business of commerce is being supplemented well by cloud, digital media, and innovation initiatives. The company’s midyear free cash flow is $5.176 billion, thanks to $7.091 in generated cash flow.

Non-GAAP net income is $5.812 billion, with the company spending more on property expansion, but less on copyright licensing compared to the prior year.

Most analysts believe Alibaba is a great growth stock that has more potential for investors than Amazon. The market may agree.

Is Alibaba Valuation Too High?

Alibaba stock is trading in the $250-300 range in the back half of 2020, which is a massive increase from the 52-week low of $161.68.

The company’s market cap is roughly half of Amazon’s, and its revenue is less than a third. But Alibaba’s profit margins are much higher than Amazon’s, and it earns comparable revenue. This is why many believe the company may be undervalued. There are two other considerations though.

If the U.S./China trade war heats up, the company could lose a chunk of revenue. But there’s a slim chance of that happening, since the company acts as a middleman for American businesses that may not be able to negotiate bulk prices on their own.

The company is also trying to expand throughout China and Asia, which could more than double its existing customer base.

Analysts upgraded Alibaba to Buy for the majority of 2020, and it’s no different heading toward the end of the year. This should give you confidence that the company will weather the storm of 2021’s recession as companies and consumers struggle to remain financially solvent.

One bad quarter of missing estimated earnings could get the stock downgraded for an entire quarter as it struggles to recover. Let’s explore that.

Will Alibaba Stock Drop?

One of the biggest advantages to Alibaba’s original ecommerce marketplace over Amazon is that it supports wholesale of bulk goods.

This connects the factories and warehouses of China to the rest of the world and allows for savvy American entrepreneurs to source goods, drop ship, and more. It’s also a foundation of China’s economic recovery from the coronavirus.

As the world reopens, China could struggle with everyone else. Alibaba is at the core of both physical and digital businesses, and it’s unlikely to drop too much in value as businesses big and small rely on them for infrastructure. In short, an Alibaba drop will be a sign of an overall market drop, especially in southeastern Asia.

Is Alibaba Stock Overvalued? The Bottom Line

Alibaba is often cited as a competitor to Amazon, and there’s validity to that comparison. Not only did they both start in ecommerce, but they grew into cloud computing, digital content, news, and more.

When the coronavirus pandemic hit, it also recovered quickly, building a buzz among analysts and investors. While it doesn’t have as large of a footprint as Amazon, it generates comparable profits, and that may make it a great buy with growth potential.

The only downside to Alibaba is it doesn’t pay a dividend. If it were to go down, there’s a good chance it’s tied to a greater overall market deflation. As the company expands its core Chinese customer base and helps fuel wholesaling exports, it is well positioned to maintain its size and even grow over the next decade.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.