Stock Valuation: Alibaba Group Holding (BABA)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price    
ALIBABA GROUP HOLDING LTD Hong Kong/NYSE Consumer Cyclical – Retail – Apparel & Specialty – Specialty Retail USD197.98    
@ 01 Jun 2018    
COMPANY PROFILE Alibaba Group Holding Ltd is an online and mobile commerce company. It operates China’s most popular online marketplaces such as Taobao (C2C), Tmall (B2C), and Juhuasuan. It also engages in advertising, digital media, cloud computing, and other.

Alibaba is the world’s largest online and mobile commerce company, measured by GMV. It operates China’s most-visited online marketplaces, including Taobao (C2C) and Tmall (B2C). Alibaba’s China marketplaces accounted for 76% of revenue in fiscal 2017, with Taobao revenue generated through advertising and other merchant data services while Tmall derived revenue from commissions, followed by digital media (9%), international marketplaces (8%), cloud computing (4%), and other revenue sources (2%). Mobile GMV accounted for 79% of consolidated GMV in fiscal 2017.

Valuation Analysis Below                  

The Price Earnings (PE) Ratio is the most frequently used valuation indicator for a stock. However, there are times when this ratio cannot be used e.g. when the company reports a loss or profit is so minimal that it results in an abnormally high PE Ratio. We use the PE Band to show whether a stock is overvalued or undevalued based on its historical PE. 
At the price of USD197.98 as at 01 Jun 2018, Alibaba Group Holding Ltd is trading at a PE Ratio of 49.2 times last 12 months earnings.  This is a 26.0% premium to its historical average Price to Earnings Ratio of 39.1 times. (Price based on the historical average PE of the company is indicated by the red line.) 
Is the stock overvalued? One should not just look at one indicator to determine the fair value of a stock. 
ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued. 
To find out more about our valuation methodology, click here.             
Source of Data: Price to Sales chart is from ProThinker Stock Report. Company description, historical financial statements data and price data are from Estimates are from gurufocus and/or – Thomson Reuters.
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