Alibaba trades at a low multiple of 10 times forward earnings, compared to Amazon that trades at 57 times for PE.
BABA valuations (source Seeking Alpha)
AMZN valuations
If we were to compare the price alone, Alibaba is trading around $75, which is around the price back in June 2016. Looking at their financials, for FY ending March 2016, basic EPS was $4.50 per share, compared to today’s Trailing Twelve Month EPS of $7.05. At the end of FY 2016, total revenues was $15.67 billion, gross profit of $10.34 billion and operating income of $$4.5 billion. Comparing to today’s (trailing twelve month) revenue of $125.31 billion, gross profit of $47.28 billion and operating income of $18.37 billion.
So that creates this huge doubt that many Baba bagholders have in their minds, why isn’t the share price appreciating?
Uncertainties on the health of the Chinese economy, and a property crisis that has spiralled out of control, coupled with signs of deflation has sparked questions if China can avoid a Japan 2.0 moment that happened back in Japan in 1990 when the stock market and property prices collapsed and has never recovered till this date. Also tensions between US and China have been heated, although there have been signs that both sides want to improve their relations. As the tensions continue to pile on, this results in foreign investors (from the US & globally) dumping their shares when there is an opportunity.
Ultimately, it depends on the investors risk appetite and if they were willing to take a risk and enter at these low valuations. Only invest in what you can afford to lose would be a good rule to follow, and never invest on borrowed money.
China's constant regulatory changes
China's National Press and Publication Administration released the new draft guidelines during the mid-morning Friday trade, sinking the Hong Kong-listed shares of Tencent & NetEase. That move plunged Tencent's market cap by almost $54 billion.
Beijing's top regulator published draft rules that were designed to clamp down on practices that encouraged spending money and time on games online. The bans include prohibition on rewards for frequent log-ins, forced player-duels and on any content deemed to violate state secrets.
It appears that the government is now prioritising their people over businesses. Gaming companies will now have to figure out ways to go around previous methods on buying in-app credits and game items, entirely overhauling their monetisation models.
EDIT: Added remarks on China's gaming regulation.
Comments