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The Magic is Real...except for price momentum. |
Overview:
Alibaba Group Holding Ltd. provides online and mobile marketplaces in retail and wholesale trade. It operates through the following segments: Core Commerce; Cloud Computing; Digital Media and Entertainment; and Innovation Initiatives and Others. The Core Commerce segment comprises of platforms operating in retail and wholesale. The Cloud Computing segment consists of Alibaba Cloud, which offers elastic computing, database, storage and content delivery network, large scale computing, security, management and application, big data analytics, a machine learning platform, and other services provide for enterprises of different sizes across various industries. The Digital Media and Entertainment segment relates to the Youko Tudou and UC Browser business. The Innovation Initiatives and Others segment includes businesses such as AutoNavi, DingTalk, Tmall Genie, and others. The company was founded by Chung Tsai and Yun Ma on June 28, 1999 and is headquartered in Hangzhou, China.Number of Employees: 66,421
CEO: Yong Zhang
Peer Group:
Stock Name (Symbol) | Last Price | Market Cap |
eBay Inc(EBAY:XNAS) | $28.44 | 27.3877B |
Amazon.com, Inc.(AMZN:XNAS) | $1502.06 | 734.5073B |
JD.com, Inc. Sponsored ADR Class A(JD:XNAS) | $19.27 | 23.2008B |
Alibaba Group Holding Ltd. Sponsored ADR(BABA:XNYS) | $150.33 | 386.6382B |
Analysis Methodology
This is a peer-based analysis that will examine six factors in order to determine the merits of an investment in BABA:- Price Momentum
- Quality
- Growth
- Income
- Value
- Profitability.
The company with the best metric value is given a score of 4 (as there are four companies in the group we are looking at), the second best a 3, the second worst a 2 and the worst a 1. The ranking process is repeated for each metric and then all of the scores for the particular factor are summed. The grand total is then re-ranked and the best company for the particular factor becomes apparent.
INVRS allows the user to analyze a company in any way they wish. The analysis could be on any factor. The metrics can be any metric. Or you can create your own models that fall out of the factor-based purview.
Price Momentum
This factor has short to medium term utility. The concept is that stocks will tend to trade in the momentum established, until the don't. Some investors with a longer term horizon might not be interested in this, but we will run it regardless. We'll use a negative scale to indicate companies with negative price momentum.The metrics we're looking at are:
- The percentage price change over two years,
- The M-12 less M-1 percentage price change (or in other words, the price change over the past 12 months excluding the most recent month),
- Price change relative to the 10 week moving average.
% change over 2 years | Rank | 12 months less 1 month price change | Rank | Price change relative to the 10 week moving average | Rank | Sum | Final Rank | |
EBAY | 1% | 2 | -16% | 3 | -10% | 2 | 7 | -1 |
AMZN | 112% | 4 | 36% | 4 | -12% | 1 | 9 | 1 |
JD | -14% | 1 | -37% | 1 | -5% | 3 | 5 | -2 |
BABA | 64% | 3 | -20% | 2 | 1% | 4 | 9 | 1 |
AMZN & BABA are the only two showing some positive price momentum, but both have two negative components.
EBAY and JD are showing negative price momentum, in my opinion JD more so.
Quality
We'll look at six metrics for the factor of quality:- Earning volatility (as measured by the standard deviation of six years of earnings)
- Gross margin (gross profit divided by sales)
- Net margin (net profit divided by sales)
- Total asset turnover (sales divided by total assets)
- Financial leverage (debt as a percentage of total capital)
- Operating leverage (fixed assets as a percentage of total assets).
Metric 1/Rank | Metric 2/Rank | Metric 3/Rank | Metric 4/Rank | Metric 5/Rank | Metric 6/Rank | Sum | Final Rank | |
EBAY | 2.14/2 | 76%/4 | -11%/1 | .37/2 | 55%/2 | 320%/2 | 13 | 2 |
AMZN | 2.37/1 | 37%/2 | 2%/3 | 1.35/3 | 61%/1 | 11%/3 | 13 | 2 |
JD | .51/4 | 14%/1 | 0%/2 | 1.90/4 | 31%/3 | 0%/4 | 18 | 4 |
BABA | 1.42/3 | 57%/3 | 25%/4 | .33/1 | 22%/4 | 1094%/1 | 16 | 3 |
JD came out with the highest quality score, followed by BABA.*
Growth
We'll look at five metrics for growth:- Total revenue change over 1 year
- EBITDA change over 1 year
- Free cash flow change over 1 year
- Gross margin change over 1 year
- Number of year over year growth in earnings.
Metric 1/Rank | Metric 2/Rank | Metric 3/Rank | Metric 4/Rank | Metric 5/Rank | Sum | Final Rank | |
EBAY | 7%/1 | -2%/1 | 13%/2 | -1%/2 | 3/1 | 8 | 2 |
AMZN | 31%/2 | 22%/2 | -33%/1 | 6%/4 | 4/3 | 12 | 3 |
JD | 37%/3 | 52%/3 | 179%/4 | 4%/3 | 4/2 | 15 | 4 |
BABA | 61%/4 | 77%/4 | 55%/3 | -8%/1 | 4/3 | 15 | 4 |
BABA and JD tied for this metric for the best growth stocks.**
Income
None of the companies under consideration offer a dividend.Value
We'll look at five value factors:- Enterprise value over EBITDA
- Price to book
- Price to earnings
- Price to sales
- Theoretical price (as calculated using the Ohlson Clean Surplus (OCS), for more information on the valuation tool, please review this article) over current price.***
Metric 1/Rank (avg 51.26) | Metric 2/Rank (avg 10.09) | Metric 3/Rank (avg 142) | Metric 4/Rank (avg 5.3) | Metric 5/Rank (avg 3.5) | Sum | Final Rank | |
EBAY | 15.07/4 | 3.57/4 | Negative | 4.19/2 | 5.6/1 | 11 | 2 |
AMZN | 38.57/2 | 26.42/1 | 245.9/1 | 3.24/3 | 5.5/2 | 9 | 1 |
JD | 117.19/1 | 3.77/3 | Negative | 1.1/4 | 1.8/3 | 11 | 2 |
BABA | 34.20/3 | 6.61/2 | 39.54/2 | 12.69/1 | 1/4 | 12 | 3 |
BABA came in with the highest score for value, but be aware that we are dealing with some pretty high valuations, specifically a PE ratio of 40. However according to the OCS, BABA is currently fairly valued, something I haven't seen in a while with tech stocks.
Profitability
We'll look at six profitability factors:- Gross profits to assets
- Net profit margin
- 5 year average pretax return on assets
- 3 year average ROE
- Net operating income margin
- Free cash flow yield
Metric 1/Rank | Metric 2/Rank | Metric 3/Rank | Metric 4/Rank | Metric 5/Rank | Metric 6/Rank | Sum | Final Rank | |
EBAY | .28/3 | -11%/1 | 10%/3 | 30%/4 | 24%/3 | 8%/3 | 17 | 3 |
AMZN | .50/4 | 2%/3 | 2%/2 | 11%/2 | 2%/2 | 1%/1 | 14 | 2 |
JD | .27/2 | 0%/2 | -3%/1 | -12%/1 | 0%/1 | 10%/4 | 11 | 1 |
BABA | .19/1 | 25%/4 | 17%/4 | 25%/3 | 28%/4 | 4%/2 | 18 | 4 |
BABA comes out number one in terms of profitability.
Summary of Results
From a quality perspective, BABA is a close second after JD. It's tied for growth for the top position with JD and it holds the top position for value and profitability. It therefore could be a candidate for a long position. However, it appears that we are at an inflection point with respect to price momentum. If it was me considering a long position, I would wait until a new price trend established itself - going long when it became clearly positive.Sign up for a free trial with INVRS and keep an eye on the price momentum.
Analysis Notes
*In EBAY's calculation for operational leverage I had to use one previous year value as the current year wasn't available.**I gave JD a lower rank than BABA for the fifth metric, even though they had the same number of year over year instances of growth. This was a judgement call on my part to reflect the fact that JD's earnings have been negative every single year, whereas BABA's have been positive every year.
***Assumptions used: The near term market return will be -7%, ROE and the dividend payout ratio will remain unchanged, no growth factor included.
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