Alibaba reports its financial results covering the last quarter of its 2021 fiscal year after the bell today, and we assess what the forecast is for the share price.
This could be an opportunity for the battered tech stock to jump back to its pre-China controversy level, if growth and guidance stays as positive as it has been during most of the previous quarters and years.
Earlier this month, the company founded by Jack Ma received a $2.8 billion fine by Chinese regulators due to alleged monopolistic practices – a figure that represented 23% of the company’s net income for the past quarter – yet the share price has been depressed since the investigation was launched in December 2020 moving from $256 to $236 by the end of yesterday’s stock trading action.
Given the seemingly temporary nature and possibly immaterial impact of this investigation on the firm’s future performance and growth, the following Alibaba share price forecast aims to determine if this could be an undervalued stock to buy ahead of the earnings release.
What is the market expecting from Alibaba for this next quarter?
Wall Street is expecting to see revenues for Alibaba (BABA) landing at $27.65 billion for the three months ended on March 2021. These revenues can be best analysed if compared with the results from the previous quarter as Alibaba’s top-line during the first quarter of 2020 was severely depressed by the impact of the pandemic in the Chinese economy.
Aside from revenues, investors will also be looking at the number of annual active consumers registered with Alibaba. This figure ended the previous quarter at 779 million, growing at a compounded annual growth rate of 18.4% in the past five years.
Meanwhile, although core commerce remains the largest revenue stream for BABA, the market will also be looking at the evolution of the firm’s cloud unit, which brought $6.65 billion in revenues during the nine months ended on December 31.
Compared to the fourth quarter of 2020, analysts’ estimates see BABA’s revenues dropping by 18.3%, possibly as they expect the normalisation of the firm’s growth rate in a post-pandemic environment while December results also reflect the impact of seasonal Christmas shopping.
Meanwhile, earnings per share are expected to land at $1.86, representing an improvement compared to last year’s pandemic-battered bottom-line but also less than half what the firm earned during the previous quarter.
What to expect from Alibaba (BABA) shares in the future?
Alibaba has surprised analysts on both the revenue and earnings fronts in the previous eight quarters at least, meaning that the company might deliver another above-average quarter in the next few weeks.
The degree to which BABA’s results differ from the market’s forecast will likely determine the direction and reaction of the stock price.
Interestingly, the consensus price target for BABA, according to data from Seeking Alpha, has been moving lower since December last year, dropping from $346 to $316 as of now. Nonetheless, this represents a 34% upside potential if such a target is hit, based on yesterday’s closing price of $235.92 per share.
Moreover, 46 of 48 analysts are currently bullish on the stock, which indicates that the market’s expectations for Alibaba shares are quite optimistic, possibly based on the stock’s currently depressed valuation and the business’ historical growth.
From 2017 to 2020, BABA has managed to grow its free cash flow (FCF) from $10.5 billion to $20.5 billion at a 25% CAGR. Meanwhile, the firm’s last twelve-month (LTM) free cash flow currently stands at approximately $27 billion.
As of yesterday, the market capitalisation of Alibaba stood at $630 billion ($560 billion excluding cash reserves). This gives us an overly depressed valuation of 20 times the company’s LTM free cash flow.
Based on those numbers, we could say that Alibaba is an undervalued stock and this temporary situation could present an opportunity for investors if the stock were to move higher – possibly aiming for that consensus Alibaba share price forecast of $316 as a first target.
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