Is Alibaba's Stock Overvalued Or Undervalued?

Alibaba Group Holding Ltd - ADR BABA shares have lagged the S&P 500 in 2021, generating a year-to-date total return loss of 28.3%.

Alibaba shares have gotten crushed after China implemented crackdowns on some of its largest tech companies, but value investors may be wondering whether the sell-off has created a buying opportunity.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 28.2, nearly double its long-term average of 15.9.

Alibaba’s PE is currently 20, significantly below the S&P 500 average as a whole. Alibaba's PE ratio is down 58.8% over the past five years, suggesting the stock is currently priced at the low end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.3. Alibaba’s forward earnings multiple of 2.4 is still well below the multiple of the S&P 500 as a whole, making Alibaba's stock look undervalued.

Alibaba’s forward PE ratio is roughly one-tenth of its consumer discretionary peers, which are currently averaging a 29.1 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Alibaba’s PEG is 1.22, suggesting Alibaba is reasonably valued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.06, well above its long-term average of 1.62. Alibaba’s PS ratio is 3.77, only 23% higher than the S&P 500.

Finally, Wall Street analysts see big value in Alibaba stock over the next 12 months. The average analyst price target among the 49 analysts covering Alibaba is $245.8, suggesting about 47.4% upside from current levels.

The Verdict: At its current price, Alibaba stock appears to be undervalued based on a sampling of common fundamental valuation metrics.