Further to our article Alibaba Share Price, this is a quick update as Alibaba just released their June 2019 quarterly results.
The chart below as provided in the results presentation, we can see that the revenue growth for core commerce and Alibaba Cloud remains impressive. As a $450-billion market capitalization company, this growth rate is more than commendable. The user base also remains stable and impressive and the company is effectively a cash generation engine. Of course, in terms of profitability, it is the core commerce business that is pulling in the dollars, but I am confident the new business lines like cloud computing, finance services etc will eventually contribute too.
In our previous article we talked about the fair value analysis and I will repeat here.
Doing a quick PhD Fundamental Analysis method taught in our class Cashflow Mastery Program, we determine:
FCF/Revenue: 25%, Net Margin: 17%, ROE: 19.85%, ROA: 10.46%
I like these set of numbers.
Looking at debt/equity, interest coverage and cash position, Alibaba definitely has a good balance sheet. There is speculation that Alibaba is seeking a dual listing in Hong Kong, we shall see how it goes but it is definitely a plus and additional funding can augur well in the various investment initiatives in the areas of cloud computing, new retail etc.
Alibaba is still growing tremendously. Earnings growth is slower than revenue growth but this is all because of the investments in new areas of growth and the rewards can be reaped at a later stage.
With that and using Discounted Cashflow valuation method, we determined that $185 is the fair value of Alibaba and if we build in a 20% Margin of Safety (MOS), a price of $150 will be a good entry point for this wonderful company.
Alibaba’s share price has since recovered from recent low of $150 to close at $177 as of yesterday.
My Investment Methodology
I have waited to get a glimpse of Alibaba’s financial performance as the China GDP slows down a little and the US-China trade war drags on. The June numbers seem to indicate Alibaba is relatively unfazed.
Nevertheless, in this volatile environment, one may want to increase the MOS requirement. At $150, if you have a long-term investment horizon, I think it is a steal but do remember cheap can become cheaper so some form of dollar cost averaging will help.
I have chosen to use Options strategies, in particular selling put options to generate some monthly income for me, with strike price around $150. However, if Alibaba share price drops to say $130 level, I will be accumulating the shares and build a good holding over time and held for the long term.
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