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Why Alibaba Is A 'Strong Buy'

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Celeritas Investments


  • Alibaba has a competitive moat and is a cash machine.
  • The company is severely undervalued when compared to eBay and Amazon.
  • However, there is a decent risk in the company's corporate structure. Thus, we recommend allocating a small percentage of your portfolio to this stock.

Alibaba (NYSE:BABA) is one of the world's fastest growing companies. Not only it has a strong competitive moat, which is scale and a strong ecosystem, Alibaba is a cash machine. However, its stock price is not reflecting the company's real position.

We believe that BABA stock is strongly undervalued and a comparison with both; eBay (EBAY) and Amazon (AMZN), proves that. It's worth noting that both of these comparisons are based on the idea that a company which has a higher growth rate and a higher FCF margin shouldn't be valued less on a price to FCF basis.

Alibaba is undervalued when compared to eBay

Both, Alibaba and eBay, share a similar business model as they connect buyers and sellers directly without requiring in-house storage of the products exchanged. This enables both companies to generate a decent amount of cash flow. But, the market is valuing eBay's free cash flows just 41% cheaper than Alibaba's free cash flow valuation, while in fact, Alibaba's growth is 13x higher than that of eBay's.

But, the market is valuing eBay's free cash flows just 41% cheaper than Alibaba, while in fact, Alibaba's growth is 13x higher than that of eBay.

ChartBABA Free Cash Flow (TTM) data by YCharts

And, not only is Alibaba's growth much-much higher, its TTM free cash flow margin is almost double that of eBay. This means, for every $1 of added revenue, Alibaba generated double the amount in FCF that eBay generated (24.7% vs. 43%).

Thus, it's unreasonable for Alibaba to be valued just 70% higher than eBay taking the huge discrepancies in growth and FCF margin into account.

Not to forget, eBay itself is undervalued as we stated in the articles linked below. Which means that Alibaba should be valued much higher than current levels.

eBay: A Safe Investment

This article was written by

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Analyst’s Disclosure: I am/we are long BABA, EBAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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