CA - Alibaba: Market Prices Reflect Weak Chinese Economy And External Risk Factors

2024-07-03 09:39:46 ET

Summary

• Alibaba is a large Chinese holding company with diverse businesses, with the Chinese e-commerce business being the largest and most important.
• The weakening Chinese economy presents significant challenges to the e-commerce business that are not easily resolved in the short term.
• A DCF valuation indicates that the stock is undervalued, but further analysis reveals that the market has valid reasons for its current pricing.
• The stock may remain undervalued for an extended period, leading to substantial opportunity costs. Therefore, the stock is rated as a "Hold".

Introduction

I have been avoiding Alibaba ( BABA ) ( BABAF ) for a long time. The China exposure scared me away, and I believed the pricing was diverging from the fundamentals.

This name came up during a conversation I was having with a friend recently, and I added it to my list to have a look at it. I must say – the current valuation was a significant factor motivating me to write a full article on the name.

It looks very undervalued based on its current earnings and historical pricing. For any company that appears too cheap, it is essential to understand the reasons why. The market may be irrational, but in most cases, it has valid reasons....

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