Ali Baba (NYSE:BABA) is a Chinese e-commerce company with a market capitalization of $ 574 billion and the largest in China. But recently, it has faced more competition and other headwinds in China. Nonetheless, Alibaba is still producing significant profits and free cash flow. As a result, BABA stock is still worth over 43% of today’s price, as I argued in my last post on May 26th.
The stock has been on a roller coaster ride since it peaked on October 27, 2020, at $ 317.14. After falling to $ 222 on December 22, BABA stock started to rally back to $ 270.83 on February 27.
But since then it has fallen to a low of $ 199.85 on July 8. It has since returned to $ 208.18 as of July 19. The last time I wrote about the stock on May 26, it was at a similar level of $ 211.78.
Future benefits and evaluation
Alibaba will release its second quarter results on August 3, which analysts say will show 49.5% higher revenue to $ 32.54 billion. Additionally, analysts expect earnings per American Depository Share (ADS) of $ 2.24. But that will be lower than last June’s $ 2.46 per ADS profit.
Nevertheless, Alibaba should be able to show positive cash flow and positive free cash flow (FCF) during the quarter. I think it will help the stock to recover as well.
For example, last year the company produced FCF 5.176 billion on revenue of $ 21.762 for the quarter ending June 2020. This means its FCF margin was 23.78%. We can use it to project its FCF in the future and later its true value.
For example, analysts now forecast revenue for the year ending March 2022 to be $ 143.26 billion (essentially 2021). Later for the year ending March 2023 (essentially 2022), revenue is expected to reach $ 173.26 billion (i.e. 20.9% growth in 2022). This is useful for our company FCF estimates.
Using the 23.78% FCF margin metric, we can estimate that 2021 will have 34.1 billion FCF and 41.2 billion FCF in 2022. This is a large amount of FCF.
What is the value of the BABA share
As of July 19, BABA stock had a market cap of $ 574 billion. If we divide the 2022 FCF estimate by Alibaba’s market cap, we can see that the FCF return is 7.178% (i.e. $ 41.2 billion / $ 574 billion). This FCF yield is simply too high. It is indicative of a business that has real problems.
For example, Amazon (NASDAQ:AMZN) produced $ 21.786 billion in free cash flow in the past 12 months (TTM) through March. This can be seen from the data on TTM’s financial site at In search of the alpha and subtracting $ 45.427 billion of investments from TTM’s cash flow operations of $ 67.213 billion. This implies that its FCF yield is 1.21% (i.e. $ 21.786 billion / $ 1.79 trillion).
Granted, Amazon is 3 times the size of Alibaba, but the difference between Alibaba’s 7.2% FCF return and Amazon’s 1.2% FCF return seems excessive.
For example, valuation of Alibaba shares with a 5% FCF return puts its value at $ 824 billion (i.e. $ 41.2 billion / 5%). This result is 43.6% higher than the current market value of $ 574 billion. It leads to a target price of $ 298.84, or nearly $ 300 per share.
If Alibaba achieves the same FCF margin as last year, it should produce a price 44% higher. It also assumes that the market will give BABA shares a lower FCF return. My guess is that the market will price the stock with a return of 5% FCF.
As of the publication date, Mark R. Hake does not hold any position in any of the stocks mentioned in the article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide that you can consult here.