Alibaba Group Holding Ltd. (BABA, Financial) has continued to face downward pressure. Many retail investors might wonder why since all of the institutions have revised their price targets upward. The problem is that most price targets derive from sell-side divisions and that not many disclose the fundamental issues of stocks. Let me illustrate why Alibaba has struggled and will continue to do so.
The underlying matter
As I noted in the first part of this series, Alibaba has been struggling as a consequence of systemic issues. The problem is that most investors don't seem to understand the problems regarding macroeconomic matters. The company has been under severe threat from the Chinese government regarding "fair industry." The fact of the matter is China doesn't accommodate companies that challenge its authority.
An integral part of any technology company is asset and data acquisitions. If you're a high-riser such as Alibaba, you're best suited to acquiring ready-made solutions instead of starting from scratch when trying to enter a specific business segment.
Compared to the United States, China has implemented a robust model to prevent data and asset acquisitions. Alphabet's (GOOG, Financial)(GOOGL, Financial) Google, Amazon (AMZN, Financial), Facebook (FB, Financial) and emerging tech companies are priced highly because of the Department of Justice and Federal Trade Commission's inability to restrict asset and data acquisitions.
I noted previously that asset and data acquisitions are simply what drives company value in big tech and, subsequently, drives big tech value.
In a nutshell, there's a severe disconnect between Chinese tech and U.S. tech. Let me illustrate using valuation.
Valuation
Let's start by looking at a few multiples. I'd like for investors to look at these multiples without thinking about systemic market issues at first.
Source: Morningstar
After looking at the multiples, I'll concede the fact it has improved over the past year as the stock's traded down by 20%. Regardless, the company still has a price-sales ratio that exceeds the benchmark by 4.96 times. The price-to-cash flow ratio also exceeds the benchmark, as does the price-earnings to growth (PEG) ratio (both should be 1).
If this were a U.S. business, the multiples are high already. A critical part of interpreting multiples is systemic risk, which has been identified in many studies to cause a downward valuation on book value.
My real valuation on Alibaba is the following.
- 10.04 EPS x 19.91 Non-GAAP P/E = $199.90
This valuation is based on historical trading patterns of the stock as well as earnings expectations. As a result, Alibaba is overvalued as a stock.
Final word
In adding on to my previous argument on Alibaba, which ended up being correct, the headwinds persist, so it baffles me how investors try and compare China versus U.S. big tech.
The business factors play into the valuation. When you look at a valuation, you need to consider systemic factors at all times. Systemic factors have caused downward pressure on a stock, which isn't a big-time hit as many thought.
