- By GF Value
The stock of Alibaba Group Holding (NYSE:BABA, 30-year Financials) gives every indication of being significantly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $216.9 per share and the market cap of $588.3 billion, Alibaba Group Holding stock is estimated to be significantly undervalued. GF Value for Alibaba Group Holding is shown in the chart below.
Because Alibaba Group Holding is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which averaged 38.2% over the past three years and is estimated to grow 23.33% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Alibaba Group Holding has a cash-to-debt ratio of 3.24, which is better than 80% of the companies in the industry of Retail - Cyclical. GuruFocus ranks the overall financial strength of Alibaba Group Holding at 7 out of 10, which indicates that the financial strength of Alibaba Group Holding is fair. This is the debt and cash of Alibaba Group Holding over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Alibaba Group Holding has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $107.1 billion and earnings of $8.099 a share. Its operating margin is 12.35%, which ranks better than 85% of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks the profitability of Alibaba Group Holding at 8 out of 10, which indicates strong profitability. This is the revenue and net income of Alibaba Group Holding over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Alibaba Group Holding is 38.2%, which ranks better than 95% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth is 10.1%, which ranks in the middle range of the companies in the industry of Retail - Cyclical.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Alibaba Group Holding's ROIC was 7.10, while its WACC came in at 6.17. The historical ROIC vs WACC comparison of Alibaba Group Holding is shown below:
In conclusion, The stock of Alibaba Group Holding (NYSE:BABA, 30-year Financials) is believed to be significantly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Retail - Cyclical. To learn more about Alibaba Group Holding stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.