The stock of Alibaba Group Holding (NYSE:BABA, 30-year Financials) is believed to be significantly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $227.26 per share and the market cap of $616.4 billion, Alibaba Group Holding stock gives every indication of being significantly undervalued. GF Value for Alibaba Group Holding is shown in the chart below.
Because Alibaba Group Holding is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which averaged 45% over the past three years and is estimated to grow 33.66% annually over the next three to five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Alibaba Group Holding has a cash-to-debt ratio of 3.93, which which ranks better than 81% of the companies in the industry of Retail - Cyclical. The overall financial strength of Alibaba Group Holding is 7 out of 10, which indicates that the financial strength of Alibaba Group Holding is fair. This is the debt and cash of Alibaba Group Holding over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Alibaba Group Holding has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $94.6 billion and earnings of $8.566 a share. Its operating margin of 16.45% better than 93% of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks Alibaba Group Holding's profitability as strong. This is the revenue and net income of Alibaba Group Holding over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Alibaba Group Holding's 3-year average revenue growth rate is better than 96% of the companies in the industry of Retail - Cyclical. Alibaba Group Holding's 3-year average EBITDA growth rate is 38.1%, which ranks better than 86% of the companies in the industry of Retail - Cyclical.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Alibaba Group Holding's ROIC was 9.22, while its WACC came in at 6.48. The historical ROIC vs WACC comparison of Alibaba Group Holding is shown below:
In conclusion, The stock of Alibaba Group Holding (NYSE:BABA, 30-year Financials) is believed to be significantly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 86% of the companies in the industry of Retail - Cyclical. To learn more about Alibaba Group Holding stock, you can check out its 30-year Financials here.
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