Alibaba (NYSE: BABA) is up in value, but think about the risks

It is seldom seen Alibaba Group Holding Limited (NYSE: BABA) Price to Earnings (or “P / E”) ratio of 19.1x as close as the US market median P / E of 18x. In addition, the business itself continues to grow and the company still holds a dominant position among Chinese competitors. However, as we all know, the main risk lies in the government’s attitude towards the company and today we are going to examine the risks of investing in a Chinese company and what the current P / E ratio means for Alibaba.

Check out our full fundamental analysis for Alibaba Group Holding

The Risks of Investing in Chinese Stocks

The most important thing is that investors are not shareholders of Alibaba. They are actually shareholders in the Cayman Islands Shell Company that Alibaba represents (this is known as the Variable Interest Entity – VIE). It is this company that is listed on the NYSE and has a contract with the Chinese company to represent its activities.

The SEC explains this structure in detail, and a high-level blueprint can be represented using this graphic:

Difference Between Shell Company and Mainland China

What we can see is that as investors in Chinese stocks we have several degrees of segregation. The reason for this is that the Chinese government has soft regulation that prevents US investors from owning stakes in Chinese companies. And while these companies grew, in fact subsidized by US and international investors, the government has been passive, but in recent months it has launched a campaign that began with crackdown on tech companies.

The worst scenario that could happen is for the government to announce to companies that they are breaking the law (and possibly they are) and be punished for doing so by forcing them to sever ties with US investors.

Every Chinese equities investment thesis assumes that it doesn’t.

A great price for the income

Suppose that big IF doesn’t happen, we’re going to look at how expensive or cheap Alibaba is for investors.

Alibaba has a P / E ratio close to the US market median, but the company is in the technology sector and 26.7 times the P / E ratio is much more representative of how similar companies in this industry are valued.

The 19.1x P / E ratio is the lowest since 2016.

NYSE: BABA price based on past earnings October 8, 2021

It is very likely that the company is a bargain right now on a pure P / E basis.

Would you like to know how analysts see the future of Alibaba Group Holding compared to the industry? In this case it is ours for free Report is a great place to start.

The growth of Alibaba Group Holding

There is an inherent assumption that a company should be in line with the market for P / E ratios like that of Alibaba Group Holding to be considered reasonable.

If we review last year’s results, the company’s bottom line fell a daunting 18%.

Still The last three year period has seen an excellent overall increase in earnings per share of 141%, despite its unsatisfactory short-term performance. While it’s been a bumpy ride, it’s fair to say that earnings growth has been more than adequate for the company lately.

Now look ahead Earnings per share are expected to increase by 5.3% per year in the next three years, according to the analysts who follow the company.

With that information, we find it interesting that Alibaba Group Holding is trading at a pretty similar P / E ratio as the market.

The central theses

As mentioned earlier, investing in VIE’s connections with Chinese companies carries a different risk. If that risk is acceptable to investors, Alibaba is likely trading as a share at a cheap price right now.

Additionally, the stock is expected to continue to grow in both sales and earnings, making it a growth stock with value below that. This is rare, but the added risk factor requires caution.

In general, our preference is to limit our use of the price / earnings ratio to determining what the market thinks of a company’s overall health.

And what about other risks? Every company has them and we discovered them 2 warning signs for Alibaba Group Holding you should know.

Simply Wall St’s analyst, Goran Damchevski, and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price.

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