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In the world of Chinese ADRs, no company attracts more investor attention than Alibaba BABA. The e-commerce behemoth is not only one of the largest publicly-traded tech companies in the world, but also a popular method for gauging the health of China’s economy and investing in the growth of its consumer marketplace.
Alibaba is clearly a dominant force in the global retail sector, as well as an interesting growth play in industries like financial services, smart vehicles, artificial intelligence, and digital media. And considering the company’s expansion opportunities and rising popularity among investors, it makes sense that BABA has been among the hottest stocks in the world over the past year, having gained about 80% over this timeframe.
Alibaba has worked to prove that it deserves this type of momentum by delivering solid earnings and revenue results. This trend is expected to continue, with our latest consensus estimates calling for the company to see EPS growth of 49% and net sales growth of 65% in the current fiscal year.
Nevertheless, Alibaba still feels like a speculative stock. BABA is currently trading with a Forward P/E ratio of 28.8, coming in well above the broader market average and slightly higher than the 24.8 average of its wholesale retail peers.
But considering how unique Alibaba is, this might not paint a complete picture. After all, investors interested in this stock are likely placing a certain premium on the continued potential of the Chinese internet and consumer markets, which are still growing at rates not seen in many comparable economies.
With that said, a quick glance at Alibaba’s historical Forward P/E reveals a much more interesting story about the stock’s valuation:
This “peer group” includes four other major Chinese internet stocks: JD.com JD, Baidu BIDU, Tencent TCEHY, and NetEase NTES. None of these companies are structured exactly like Alibaba, but they all compete in various markets and help show how investors value China’s internet industry in a more general sense.
There are few key trends to notice here. First of all, BABA is currently trading with its lowest in valuation in terms of forward earnings in over a year. While the stock might still be “expensive” compared to the broader market, investors have likely never been able to purchase it at this cheap of a level.
The second thing we notice is that Alibaba has traditionally traded at a premium compared to its Chinese internet peers. However, over the past month or so, the average Forward P/E of this group has risen while BABA’s has slumped—and now for the first time in at least a year, Alibaba is trading at a discount to the rest of this group.
However, Alibaba is actually not the cheapest stock in this set. In fact, BIDU’s current P/E is slightly lower, and NTES is trading at a significant discount. Here’s how Alibaba’s valuation compares to that of online gaming giant NetEase:
As we can see, BABA has traditionally traded at a premium to NTES, and although that gap has narrowed slightly over the past few months, the difference in valuation is certainly still noticeable.
Of course, Alibaba bulls will be quick to point out the reasons for this premium. For one, the company gives investors more diversified exposure to the Chinese economy than NetEase, which is focused on specific markets like gaming and digital content. It is also possible that Alibaba has more exciting growth potential because of its investments in new revenue sources.
BABA is currently sporting a Zacks Rank #3 (Hold), as well as an “A” grade for Growth in our Style Scores system. The company is clearly set to see massive earnings and revenue growth this year, but recent analyst activity has been mixed. Within the past 60 days, we have seen five positive revisions and four negative revisions to Alibaba’s full-year earnings estimates.
Alibaba will likely maintain its lightning-fast expansion for the next few years at the very least, but mixed analyst sentiment can cause short-term headwinds for the stock. Still, the company looks like a solid option for long-term investments in China.
Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!
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JD.com, Inc. (JD) : Free Stock Analysis Report
Alibaba Group Holding Limited (BABA) : Free Stock Analysis Report
NetEase, Inc. (NTES) : Free Stock Analysis Report
Baidu, Inc. (BIDU) : Free Stock Analysis Report
Tencent Holding Ltd. (TCEHY) : Free Stock Analysis Report
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