Why Alibaba is a buy before earnings
$Alibaba(BABA.US$ Shares of Alibaba have been in for a roller-coaster ride this year. Alibaba was caught in the middle of a major crackdown on multiple sectors of the Chinese economy in 2021. After the CCP decided to strengthen regulatory oversight and force Chinese enterprises to consider China's national security interests as part of their business strategies, valuations for major Chinese growth stocks cratered. The crackdown started off with financial service providers which made cryptocurrencies available to their customers and quickly spread to e-commerce companies, internet firms offering gaming products for children, for-profit businesses and even food delivery startups. The justification for Beijing in all of these instances has been to uphold rules of economic fairness by cracking down on companies that are said to engage in monopolistic behavior. Most large Chinese companies were targeted by China's anti-trust watchdog, the State Administration for Market Regulation, including Alibaba and $TENCENT(00700.HK$.
Most recently, enforcement regulations have taken a backseat to a new force emerging in the Chinese stock market: Multiple Chinese real estate and development firms are nearing bankruptcy as a downturn in property prices created a liquidity crisis that might get worse. Relying on massive amounts of easy debt, these firms have built development projects on speculation. Now that prices are dropping, the supply-demand mismatch is creating serious liquidity problems for firms like Modern Land, China Properties Group or $EVERG SERVICES(06666.HK$ .
Alibaba may be able to escape the selling pressure in the Chinese market if the company tables an impressive earnings card for the last quarter next week and I believe Alibaba will be able to do this! Although there is no official earnings date announcement, the earnings card is expected for November 4, 2021, according to Nasdaq information.
Alibaba's e-commerce business is soaring, and the segment's growth even accelerated during the global Coronavirus pandemic. Alibaba's e-commerce business, responsible for 88% of revenues and 92% of EBITDA profits, is far and away the most important business driver for Alibaba. An additional breakdown of Alibaba's e-commerce revenues shows that international e-commerce retail and Alibaba's logistics business, branded under the name Cainiao, saw the highest year-over-year growth rates of 54% and 50%. The Cainiao network is expanding rapidly in China but also invests in a smart logistics network to deal with accelerating cross-border transactions.
Alibaba is also looking forward to generating higher free cash flow in the future, which could drive a revaluation of Alibaba's shares. This is because the company's free cash flow in the last quarter was impacted by China's anti-monopoly fine which lowered the firm's free cash flow by 9.1B Chinese Yuan ($1.4B). The total fine was 18.2B Chinese Yuan ($2.8B) and was levied on Alibaba due to alleged anti-competitive practices. Although Alibaba recognized 50% of the anti-trust fine, the free cash flow was still 20.8B Chinese Yuan ($3.3B). Alibaba's free cash flow margin, after accounting for the anti-trust fine, was 10%. In the year-earlier period, Alibaba's free cash flow margin was 24%. I believe Alibaba could return to a 20% free cash flow margin next year.
Looking ahead into the future, we can see that Alibaba's revenues are modeled to grow at a rate of 17% annually between FY 2021 and FY 2026. After receiving a big fine this year, Alibaba played nice with the CCP which could reduce the probability of receiving new fines in the future.
Let's assume that Alibaba will not get any more anti-monopoly fines and grow revenues at a rate of 17% annually, which is implied in revenue forecasts until FY 2026.
By 2026, Alibaba is expected to have revenues of $263.7B. If Alibaba's free cash flow margin stabilizes around 20% over the next five-year period, which I believe is plausible, then it could become a $52B a year free cash flow business… and the estimates have upside because Alibaba's other two businesses, digital media and cloud computing, will also start to make positive cash contributions to the firm. After all is said and done, I believe Alibaba could generate $52B in annual free cash flow by FY 2026, which is twice the free cash flow the firm generates currently. The firm's free cash flow is cheap compared to last year.
Revenue estimates are rising and should continue to rise after results for the September quarter have been submitted. Alibaba's P-S ratio is just 2.4, less than half the ratio from last year!
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Marshall Cantone : ONCE AGAIN, ANOTHER GREAT ARTICLE. I HAVE NO QUESTIONS ABOUT BABA, BECAUSE YOU COVERED EVERYTHING QUITE WELL. I WOULD, HOWEVER, LIKE TO KNOW WHAT YOU THINK MIGHT HAPPEN WITH BIDU AFTER BAIDU RELEASES ITS EARNINGS REPORT AROUND THE MIDDLE OF THE MONTH. KEEP IN MIND THAT BAIDU JUST HIRED RONG LUO AS CHIEF FINANCIAL OFFICER. I HEARD THAT LUO IS IN GOOD WITH THE CCP, WHICH I BELIEVE COULD HELP THE COMPANY SIGNIFICANTLY. I'D BE THRILLED TO HEAR YOUR THOUGHTS.
LET'S GO BRANDON!
TH Analysis : May test 140 one more time before the up move is anchored in.
20 wk Moving Ave is still holding strong as Dynamc resistance for the current down trend. Seems like the end ( of down trend ) is near - if not here.
Dogoro777 TH Analysis: BABA management have zero, maybe negative incentive to report strong earnings.
Aaron_Kelly Dogoro777: Totally agree. They are at the crosshairs of being asked to share their wealth. If I were management I’ll guide down for sure.
Austin ONeill Aaron_Kelly: Yep -- no other country taxes corporations. LOL -- that common prosperity fund is simply a tax -- a few more percentage points -- quite a reasonable approach to slightly reigning in the mega techs which, even more in China than in US, are threatening to eat the whole economy. Too smart for US to think of where government will invoke toothless anti-trust laws, sue some of the mega-techs, a process which will take a decade, cost taxpayers a billion dollars and result in no action.
Kieron Morley : They also have zero, maybe negative incentive to make Alibaba Group shareholders rich.
William Paul Kieron Morley: Lots of people have money in BABA. Both in China, Chinese govt, and around the world. Like rich people. And they are long BABA. That's a huge huge incentive. Ignore the FUD
Brain Gomes William Paul: Bears are so loud with they got Xi on their side as he smack tech down, but they don't realize Xi is now on the Bull side with regulations silence and PBOC release liquidity again.
GM 1 William Paul: He’s saying ER will not need to look good, since theRe’s no need to enrich the ALIBABA sharesholders. A very attractive ER atm might just attract unnecessary attention from the CCP? Thus We shouldn’t expect the share price to rally substantially anytime soon