JD - Alibaba: Don't Buy Fair Businesses At Wonderful Prices

2024-06-13 11:58:07 ET

Summary

• BABA stock currently trades at attractive valuation multiples, with P/E ratios at a deep discount compared to sector median and historical levels.
• However, the low P/E is not attractive as on the surface once you consider the growth potential, policy uncertainties, and restructuring uncertainties.
• For example, Consensus projects point to a tepid EPS growth rate with about 1.7% CAGR over the next five years.
• The PEG ratio is thus over 5.5x, far above the 1x deal most growth investors seek.

BABA stock used to be a wonderful business

In my mind, the current situation surrounding Alibaba stock ( BABA ) can be summarized as a fair business for sale at a wonderful price. Indeed, the stock is for sale at very attractive valuation multiples. As you can see from the chart below that summarizes BABA stock's valuation grade , the stock's P/E ratios are at a deep discount both relative to the sector median and its own 5-year average levels. In terms of Non-GAAP P/E, BABA's ratios are in the single digits only, compared to a sector median of around 15x. Indeed, this is the point that many bullish arguments tend to emphasize. The argument is that such a P/E is too attractive for a market leader in a growing sector....

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