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| Over the past few months, Alibaba's stock price has taken a wild, bumpy ride |
A year later, China's stock market is in turmoil, and its flaming, booming economy is waddling in uncertainty. Alibaba's stock has since taken a wild, tumultuous ride, and some have doubts about the once-glowing prospects for the company. But what do the fundamentals say--Alibaba's bottom line, its earnings, its business activity, and its prospects to sustain Amazon-like growth in revenues and customers?
Alibaba share prices in the U.S. are on a roller coaster with swirls, bumps, and tumbles sometimes unbearable. At the IPO, the stock was priced at $68/share, the company raised over $21 billion, and it had an aggregate market value that quickly climbed toward $200 billion--planting it in the market-value league of Apple, Google, and Facebook.
After the IPO, its price surged toward $100/share, eventually reaching $120. In early September, the price had fallen to $65 (Sept. 15) and $62 (Sept. 22) with total market value below $165 billion. The stock has traded within a range of $58-120/share the past year.
Do current prices reflect a more realistic value of Alibaba? Were peak market values overblown because of fanfare, popularity, and over-promotion? Or is Alibaba's current value influenced by grave concerns and negative long-term prospects in China?
Market metrics suggest the company's stock values might still be attempting to find that right trading range after the initial hoopla--a correction atop a correction. Recent PE (price-to-earnings) ratios show valuation is likely in a realistic range, while some of its U.S. Internet peers may be trading at values that continue to rely on (and hope for) astounding growth.
Alibaba's PE has declined from about 40 to 23 in recent weeks, partly because of the decline in growth expectation, despite the company continuing to report stunning earnings in the midst of Chinese woes and negative outlook. Market values and PE's are also influenced by (a) investors now requiring a higher return to compensate for greater risks (therefore, increasing "equity cost of capital") and (b) a conservative assessment of growth, which might have exceeded 10% last year, but may have dwindled into single digits.
By comparison, PE's at Google and Facebook are 31 and 98, respectively. Expectations of growth explain much of those PE ratios and swings. (Apple's latest PE has dipped below 15. Investors aren't sure Apple has another trick in its bag of magic.) The more investors forecast significant growth in a company's business (and its revenues and earnings), the more they are willing to pay for value and for current earnings.
Investors don't like uncertainty, too. So while it's likely Alibaba will grow and spread its business around the globe among an assortment of activities, turmoil in China means uncertainty, which lends doubt to whether Alibaba can achieve what it has set out to do. Hence, expect a few more wild rides in its stock price.
Does Alibaba belong in a league of Google, Facebook, Amazon and Apple in discussions of Internet and technology companies and their market values? Alibaba generates revenues of about $12 billion (and climbing), which puts it on par with Facebook, but is dwarfed by the behemoths Google, Amazon and Apple (which range from 4-10-times larger). Despite the stock-price swirls in recent weeks, Alibaba's $160 billion market value still keeps it in the same value hemisphere and secures it as the world's fourth largest "Internet" company: Google, $437 billion; Facebook, $264 billion; Amazon, $251 billion.
Recent performance statistics show the company riding a remarkable upswing. Revenues (about $12 billion) grew 45% last year and are headed toward $13 billion or more this year, although not at a similarly stellar rate. Earnings ($4 billion) are expected to grow this year, as well.
This translates into returns on equity above 25% (28% last year). Returns are high because revenues are growing steadily, profit margins are high, and the company has been comfortable exploiting debt to keep financing costs low.
Alibaba's sales growth matches that of Amazon. (Alibaba makes gobs of money, while Amazon is indifferent to its bottom line and reports earnings every now and then.) The business models of the two firms differ, nevertheless. Alibaba is Amazon without the warehouse facilities dotting the country--more like eBay, but with Amazon's eye toward expanding into new businesses and new markets with the flick of a finger.
The company, similar to Apple, has become, at least for now, a mega-cash-flow machine, generating about $6 billion in annual cash flow from operations and attracting bundles more from the IPO and new borrowings. About $20 billion of cash sits on its balance sheet, ready to be funneled into whatever new business, new investment or new operation that suits the whims (or visions) of its CEO.
In recent years, the company has plowed billions in new investments, which will likely support continued growth, but which also makes for a complex, difficult-to-unravel organization (in the eyes of many analysts). Alibaba is a challenge to analyze because of complex ownership arrangements, labyrinthine organization charts, vague minority interests, cloud-computing businesses, e-commerce businesses, a payments business and a search engine.
Bottom-line results, impressive to date, are why it could step into the U.S. and sell equity to those who know little about Chinese commerce. What could keep the company from continuing to perform and keep its stock price stuck below $70/share for months to come?
1. The entire globe wonders about or is worried about the prospects of Chinese economics, which would have direct impact on Alibaba's immediate results. But as the economy there transforms from over-emphasis on infrastructure investments and real estate to one of service and consumerism, Alibaba is poised and will pounce on the transition.
2. Just as Amazon has Bezos, Facebook has Zuckerberg, and Apple had Jobs, Alibaba has Ma, who like the others sets the agenda, articulates the vision, knows precisely from where growth will come, and convinces the world to buy the products or use the service. He, like the rest, sticks to his convictions. He also attracts the talent, selects the right people to run operations, and keeps the company on a proper course. Ma doesn't seem distracted, disappointed or too concerned yet.
3. The company will continue to be a giant jigsaw puzzle of organizations and activities. Equity analysts will be pleased by earnings and growth (especially during a China downturn), but will continue to be stumped by unwieldy, maze-like organization structures. As Ma and corps continue to make new investments, the structure will get more complex. Simplicity in structure could raise market values a few billion, just as it did when Google reorganized this summer. Google analysts can can define more precisely where operations cash flow is derived and where true value lies.
4. Unlike Apple, but like Amazon and Facebook, Alibaba is comfortable with debt and its burden. Debt offers cheap funding and an added source of cash to support growth, expansion and new investments. At some point, debt becomes too much of a burden. Alibaba, with about $8 billion in debt on the balance sheet (and room to take on a few billion more), can manage the current debt load with no difficulty and may not likely tap into debt markets as much, because it won't need to. It is piling on cash from business operations.
5. Yahoo holds a significant portion of Alibaba stock (over $20 billion) and is entitled to a prominent voice at the board table. Yahoo wants to spin off this investment, focus on its own challenges and had planned to do so this year. Alibaba stock gyrations have spurred Yahoo to postpone this sale. Yahoo still sits at the table, but has been passive about its investment, exerting silent influence in how Ma runs the company. Yahoo, over the next year, will be around, but with negligible impact or say-so, as Alibaba encounters this momentarily rough patch in China's economy.
Alibaba, jostled and shaken while taking the summer-time rocky ride, will survive in tact. Revenues may not likely surge as before, and stock values will continue to rattle and roll until year-end, but high profit margins and an economy that is encouraging consumer spending will keep it in the big leagues among Internet powerhouses.
Tracy Williams
See also:
CFN: Alibaba and Its U.S. IPO, 2014
CFN: Facebook IPO: The Lucky Underwriters, 2012
CFN: Google Reorganizes, 2015
CFN: Twitter and Its IPO, 2013
CFN: China, Greece and a Stressful Summer, 2015
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