Alibaba: Pullback Time? – Alibaba Group Holding Limited (NYSE:BABA)

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Investment Thesis

Alibaba (BABA) stock has doubled in less than a year, from $86 to $180. Will it hold its massive gain? Technicals suggest that the stock trades closer to an overbought condition, which means that selling may take place in the future. On top of this, the founder, Jack Ma, is planning on selling 9% of his BABA share over the next 12 months.

The plan allows for the sale of up to 16 million shares of the Company over a 12-month period commencing in October 2017. The 16 million shares of the Company represent approximately 9% of the holdings under Mr. Ma’s beneficial ownership. The sales will occur from time to time pursuant to fixed instructions for trades based on prices and volume restrictions, to be executed by third-party brokers.

The company says that the reason for the planned selling is for ordinary wealth planning purposes and to meet philanthropic commitments. I expect that, based on technical recommendations, the upcoming planned shares sale may affect the share price.

Bear Case

According to businessinsider, Alibaba is still the most shorted company in the world, by a mile. Sentiment is very negative, as evidenced by the short volume representing over 60%.

Source: Tradingview

The company generates a majority of its revenue (about 80%) from China, and so is reliant there, and it is risky to rely on one country. As China’s economy slows down, BABA is affected. I would also watch out for the constant increase of the cost of revenue; at this pace, it will affect the company’s bottom line.

Source: Created by Author (data obtained from SEC filings)

China’s GDP growth rate is a concern; we see that their growth rate is in a constant decline–7.4%, 6.9%, and 6.7% for 2014, 2015, and 2016 respectively. According to the International Monetary Fund (IMF), China’s growth rate for 2017 – 2021 is expected to decline to 6.4%. A strengthening of the Chinese Yuan would affect the company’s revenue and net income.

Source: Forbes

Consumer spending growth for 2018 is expected to decline, and in terms of the current political situation, the relationship between China and India is tense. Overall, the macro environment for 2018 doesn’t favor the company.

Source: Tradingview

A year ago, Jack Ma said in an interview that his company’s market cap is the same size as Wal-Mart’s (NYSE:WMT). In the past year, things have changed quickly. BABA’s market cap has increased to 452.56 billion, while WMT’s remains the same at 240.11 billion.

Source: Tradingview

As we can see from the chart above, from 2015 – 2017 WMT’s share price followed BABA’s share price. In 2017, BABA’s share price skyrocketed.

12 Months Revenue Growth %

5 Years Revenue Growth %

12 Months Free Cash Flow Growth %

5 Years Free Cash Flow Growth %

Wal-Mart

4.8%

3.6%

-14.6%

16%

Alibaba

46.7%

70.8%

38.5%

77.90%

Further, in both revenue growth and free cash flow growth, Alibaba outperformed Wal-Mart. During fiscal 2017, the company’s revenue growth has become impressive and their stock has doubled.

Alibaba’s free cash flow growth is impressive, at +38.5% during the past twelve months, while Wal-Mart’s revenue growth is basically stagnant.

Source: Gurufocus

However, Wal-Mart’s share performance was solid: its one-year share performance stands at +10.3%, while Alibaba’s share performance stands at +70.15%. Alibaba’s share performance reflects its revenue and free cash flow growth of +50%.

Source: Gurufoucs

In terms of earnings per share, WMT stock is better than BABA. In book value, BABA is better than WMT. In terms of both revenue growth and free cash flow growth, BABA is better than the WMT.

The past 12 months’ growth was fabulous, but past performance can’t guarantee future performance. JD.com is the direct competitor of Alibaba, and JD.com’s year-over-year growth stands at 42%. I strongly believe that JD.com could slow down Alibaba’s growth if it continues to perform at this pace. On top of this, Wal-Mart increased its stake in JD.com to 12.1%. With the help of Wal-Mart, I expect JD.com will continue to outperform. Based on the future cash flows for the next five years (2017 – 2021), the intrinsic value of BABA stock is $85, according to Simply Wall Street. Thus, the stock is the overvalued.

Source: Simply Wall St.

Conclusion

Technicals suggest that the stock is trading close to an overbought condition, and there are overall good reasons for a sell recommendation. In a highly competitive market, we are not sure that Alibaba will continue to perform at the same pace, and macro environments for 2018 don’t favor the company. Founder Jack Ma’s plans to sell his 9% of BABA shares in next 12 months will put a lot of pressure on the share price. Altogether, therefore, I recommend BABA as a SELL.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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