Alibaba Is Down 60% From Its All-Time High. Is This the Once-in-a-Decade Setup That Patient Investors Wait For?
Profits and cash flow have collapsed while the company spends heavily on AI and a costly commerce war.
Overview
Alibaba (NYSE: BABA) closed below $115 on Aug. 31, putting it about 60% below its all-time closing high of $298.65 set in October 2020. The math on that drawdown may look like a gift. I do not think it is one, and here are three reasons why.
This is the part that breaks the "cheap stock" framing. In the June quarter, Alibaba grew revenue 8.6% to RMB 268.95 billion. But net income excluding extra items fell 75.6% to RMB 10.54 billion from RMB 43.12 billion a year earlier. Basic earnings per share (EPS) dropped from RMB 18.57 to RMB 4.51.
Details
Profit margins compressed from 14.8% to 7%. When you buy a stock 60% off its high, you are implicitly assuming that the earnings that justified the old price still exist. Here, they have been cut by three-quarters. Adjust the multiple for that, and the discount shrinks fast.
Source
Originally published at www.fool.com.