Saturday, November 24, 2018

Alibaba - The Time Isn't Now

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 PriceMarket Cap
eBay Inc(EBAY:XNAS)$28.4427.3877B
Amazon.com, Inc.(AMZN:XNAS)$1502.06734.5073B
JD.com, Inc. Sponsored ADR Class A(JD:XNAS)$19.2723.2008B
Alibaba Group Holding Ltd. Sponsored ADR(BABA:XNYS)$150.33386.6382B

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.
Each factor uses several metrics each providing different insight.  For example, the profitability factor looks at gross profit to assets, net profit margin, the 5 year average on the pretax return on assets, the 3 year average ROE, net operating income margin and the free cash flow yield. 

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.
The results:


% change over
2 years
Rank12 months less 1
month price change
RankPrice change relative to the
10 week moving average
RankSumFinal
Rank
EBAY1%2-16%3-10%27-1
AMZN112%436%4-12%191
JD-14%1-37%1-5%35-2
BABA64%3-20%21%491

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:
  1. Earning volatility (as measured by the standard deviation of six years of earnings)
  2. Gross margin (gross profit divided by sales)
  3. Net margin (net profit divided by sales)
  4. Total asset turnover (sales divided by total assets)
  5. Financial leverage (debt as a percentage of total capital)
  6. Operating leverage (fixed assets as a percentage of total assets).


Metric 1/RankMetric 2/RankMetric 3/RankMetric 4/RankMetric 5/RankMetric 6/RankSumFinal
Rank
EBAY2.14/276%/4-11%/1.37/255%/2320%/2132
AMZN2.37/137%/22%/31.35/361%/111%/3132
JD.51/414%/10%/21.90/431%/30%/4184
BABA1.42/357%/325%/4.33/122%/41094%/1163

JD came out with the highest quality score, followed by BABA.*

Growth

We'll look at five metrics for growth:
  1. Total revenue change over 1 year
  2. EBITDA change over 1 year
  3. Free cash flow change over 1 year
  4. Gross margin change over 1 year
  5. Number of year over year growth in earnings.


Metric 1/RankMetric 2/RankMetric 3/RankMetric 4/RankMetric 5/RankSumFinal
Rank
EBAY7%/1-2%/113%/2-1%/23/182
AMZN31%/222%/2-33%/16%/44/3123
JD37%/352%/3179%/44%/34/2154
BABA61%/477%/455%/3-8%/14/3154

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:
  1. Enterprise value over EBITDA
  2. Price to book
  3. Price to earnings
  4. Price to sales
  5. Theoretical price (as calculated using the Ohlson Clean Surplus (OCS), for more information on the valuation tool, please review this article) over current price.***
Here are the results:


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)
SumFinal Rank
EBAY15.07/43.57/4Negative4.19/25.6/1112
AMZN38.57/226.42/1245.9/13.24/35.5/291
JD117.19/13.77/3Negative1.1/41.8/3112
BABA34.20/36.61/239.54/212.69/11/4123

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:
  1. Gross profits to assets
  2. Net profit margin
  3. 5 year average pretax return on assets
  4. 3 year average ROE
  5. Net operating income margin
  6. Free cash flow yield
 Here are the results:


Metric 1/RankMetric 2/RankMetric 3/RankMetric 4/RankMetric 5/RankMetric 6/RankSumFinal
Rank
EBAY.28/3-11%/110%/330%/424%/38%/3173
AMZN.50/42%/32%/211%/22%/21%/1142
JD.27/20%/2-3%/1-12%/10%/110%/4111
BABA.19/125%/417%/425%/328%/44%/2184

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.

Disclaimer

Part of intelligent investing involves taking on risk levels appropriate to one's circumstances.  We don't know what your's are and this analysis should not be construed as investment advice.  INVRS, its parent company, its officers, directors and employees cannot be held responsible for any investment decisions you make.

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