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Alibaba - E-commerce Juggernaut

Topic: Technology
Publication Type: Market Commentaries , Articles

Alibaba (NASDAQ: BABA) is a technology giant specializing in e-commerce, retail, internet, and cloud technology. The company recently has seen immense carnage interns of stock prices. There are various concerns related to the tech companies in the home country as well as Covid concerns led to Alibaba's stock price plunging. The company shed over 62% last year led by multiple headwinds. With the plunge in the Alibaba's stock prices investors 


Alibaba's Q3 FY22 Earnings:

Furthermore, the company reported Q3, 2022 earnings with revenue increasing by 10% year on year basis due to international and China e-commerce business growing by 18% and 7% respectively. The cloud business of Alibaba grew by 20% YoY to 19.5 billion yuan. The company’s annual active consumers at $1.28 billion. The company’s cloud business grew by 50% last year. In the trailing twelve months period, the China commerce sector has around 882 active consumers reflecting a 20 million increase quarterly. This growth was primarily driven by tobacco deals.

The company has been constantly growing and investing in different profitable businesses and gains succession other verticals for example Alibaba Cloud. The Chinese cloud market is expected to grow by approximately 91.3% in the next 2 years, which gives the cloud business a bit of room to grow not just domestically, but internationally as well.


Domestic Woes:

The technology sector in China has faced a lot of headwinds with covid lockdown and a raft of new stringent regulations on the tech firms. The new regulations aim to curb consumer rights abuse, monopolistic practices, data privacy break off the consumers, and minor protection from tech games. The new regulations led to approximately $2.8 billion charges on Alibaba for violating anti-monopoly rules. The companies faced supply chain bottlenecks due to the lockdowns and pandemics.

China has recently signaled the ease of crackdown of the regulations and stringency on the tech sector last month. President Xi Jinping aims to bolster the economy as the businesses face growth-sapping covid-19 lockdowns.

With all the headwinds faced by the company, the financial figures for Q3 showed steady progress towards their aim. There are still uncertainties ahead for the firm, which has led some analysts to be skeptical and some to predict future profits.

The company has delivered steady results and continued with its multi-engine growth strategy mentioned in a complex and volatile market.

With such turmoil in the situation, there are various key ratios to guide the way to making investment and trading decisions. The rations act as an indicator for decision-making.


Ratios to Analyse:

  1. Price to Earnings Ratio.
  2. Price to Sales Ratio.
  3. Price to Book Ratio.


Price to Earnings Ratio (PE):

This ratio derives from the relation between the Current Market Price (CMP) of the company and the Earning Per Share (EPS). This ratio explains what the market is willing to pay for the profits and earnings either past or the future earnings of the company. This ratio also helps in determining whether the price is either undervalued or overvalued.

For example, if A stock is trading at $100 per share, and the company generates $4 a share annually, the P/E ratio of the company is 25x (100/4). This 25x can be interpreted that given the current earnings of the company it will take around 25 years of accumulated earnings to get equaled the cost of investment. This ratio changes based on the company’s earnings.

Variants of P/E ratio:

Trailing twelve-month (TTM) PE:

One way to calculate the PE ratio is by adding the last 12 months’ earnings. In this case, the past earnings have been factored in the ratio, this helps benefit reported and actual data. This is one of the widely used methods of calculating the PE ratio.

Forward Earnings Approach:

The PE ratio can be calculated by using the estimate of the company’s earnings per share in the future. This ratio benefits from the available information about the company and how the market expects the company to perform in the coming years based on distinct reasons. The reported data is not much of a benefit in this ratio, it can just be the starting point for the calculation.

The Shriller Price to Earnings Ratio:

This last way of calculating the PE ratio is by averaging the earnings per share over some time. Also known as CAP/E ratio (Cyclically Adjusted Price Earnings ratio)

This ratio is calculated by dividing the price by the average earnings of approximately 10 years, adjusting to inflation.


Price to Sales Ratio (P/S):

This ratio compares the company’s market capitalization to the revenues or at times the market price to the revenues. This helps the investors to analyze if the company is overvalued or undervalued as compared to the revenues and the sector benchmark. One indicator here is the lower the ratio the more attractive the investment is, but at the same time, there needs to be a reason and a guideline for the company in the future to make the lower P/S ratio justified and make them profitable investments. This ratio is used in the automotive industry primarily, to analyze the vehicle supply as well as the lag if any.


Price to Book Ratio (PB):

This ratio is used to compare the company’s current market price to the book value of the company on its balance sheet. The book value is the amount that would be left if the company liquidated all the assets and paid back all the liabilities. This ratio is primarily used in the financial, banking, real estate sectors, and investment trusts. This ratio indicates how much equity the investors are paying for each dollar in the net assets of the company.

If the ratio is less than 1 the company is said to be undervalued and if it is more than one then it is assumed to be an overvalued investment, but it also depends on the company when analyzing.

These ratios guide the investors and traders to make informed decisions. They help in the evaluation of the company, which includes all the factors in the books of the company as well as the market and the economic factors.


Source: Alibaba press release.



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