Sell ​​Alibaba Stock: Continued Downside Potential Isn’t Over (NYSE: BABA)

Dang Quan Vuong profile picture

andrew burton

investment thesis

Although Alibaba Group Holding Ltd (New York Stock Exchange: BABA) has recently been undervalued in the competitive e-commerce industry, its poor balance sheet and cash flow statement could lead this company into financial difficulties in the near future.

alibaba Cash flow statement

Units are in millions of dollars.

BABA Cash Flow Statement
March, 15th March 16 March 17 March 18th mar-19 March 20 March 21st March 22 TMT
Gross profit 8,447.50 10,347.80 14,471.20 22,958.10 25,740.20 32,474.10 45,444.00 49,578.40 46,060.10
Net income 3,913.40 11,071.70 6,342.70 10,216.80 13,094.60 21,098.90 22,980.20 9,817.50 5,946.10
Free Cash Flow / Stock $2.31 $2.90 $3.80 $5.99 $5.85 $7.95 $10.67 $5.23 $4.34
Total Depreciation and Amortization 718.6 1,081.00 2,060.00 3,488.60 5,503.30 5,990.40 7,311.60 7,580.50 7,095.50
capital expenditures -1,242.80 -1,680.30 -1,598.30 -3,128.80 -5,286.70 -4,595.80 -6,325.80 -8,407.60 -9,723.90
Change in other net operating assets -188.4 521.5 69.4 1,661.80 3,062.00 1,548.30 4,932.50 -3,065.80 -2,901.30
Other investment activities 177.3 121 -36.7 -71.7 -1.2 -32.2 -142.2 -142.6 7,428.70
Repurchase of common shares -43.6 -3,066.90 -1,914.30 -1,619.90 -118 -9,656.00 -12,701.90

Alibaba’s gross profit has remained stable, with values ​​in millions of dollars of 45,444 in March 2021, 49,578.4 in March 2022 and 46,060.1 in TTM 2022. However, net profit fell by around 57, 3% between March 2021 and March 2022, from 22,980.2 to 9,817.5 million dollars. In TTM 2022, net income is estimated at around 5,946.1 million dollars. In a nutshell, $100 of gross profit generated approximately $50.57 of net income in March 2021, but the same amount of gross profit generates only $19.8 and $12.91 of net income in March 2022 and TTM 2022, respectively. As a result, operating productivity is low as the probability of converting gross profit to net profit has been reduced.

Net Profit / Gross Profit

Net Profit / Gross Profit (Looking for alpha)

Meanwhile, $100 of gross profit generated $0.02 free cash flow per share in March 2021, while it may generate only $0.01 free cash flow per share in March and TTM 2022. It’s worth noting because Total depreciation and amortization and capital spending have grown since then. after. It implies that Alibaba must incur significantly higher expenses to generate a comparable amount of cash. In addition, the firm has spent approximately $7,428.7 million and $12,701.9 million, respectively, on other investment activities and common stock repurchases despite having more operating liabilities than operating assets, with a change in other net operating assets of -2,901.3 million dollars in TTM 2022. Therefore, Alibaba has not used its operating expenses efficiently in recent quarters, although its free cash flow remains positive.

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Free cash flow per share / Gross profit

Free cash flow per share / Gross profit. (Looking for alpha)

Alibaba’s balance sheet is not well organized

Units are in millions of dollars.

SLIME balance
March, 15th March 16 March 17 March 18th mar-19 March 20 March 21st March 22 latest report
Cash and equivalents 17,451.90 16,549.90 20,874.00 31,771.00 28,305.60 46,664.70 49,028.90 29,949.50 26,377.10
Short-term investments 2,872.20 1,375.50 1,026.00 1,737.70 1,965.10 4,618.70 24,751.30 41,823.60 42,767.50
Other current assets 356.3 576.7 889.5 1,985.70 3,292.10 4,755.00 8,638.20 10,130.30 27,115.80
Other long-term assets 473.3 778.4 960.1 2,229.30 2,798.90 2,221.70 2,342.80 3,251.90 16,648.20
Accumulated expenses 1,349.60 1,649.80 1,590.50 2,526.60 3,094.20 3,154.10 5,004.70 5,851.80 39,635.10

Alibaba’s balance sheet appears to be in disarray as it has too many assets and investments, regardless of the rapid turnover of cash and cash equivalents. While it had $49,028.9 million in cash and cash equivalents in March 2021, it had dropped to $29,949.5 million in March 2022 and now stands at $26,377.1 million. It’s understandable given the drop in net income and free cash flow. At the same time, short-term investments have risen sharply from $24,751.3 million in March 2021 to $41,823.6 million in March 2022, and now stand at $42,767.5 million, according to the latest report. Meanwhile, other current assets have gone from 10,130.3 million dollars in March 2022 to 27,115.8 million dollars in the last report. Other long-term assets were worth $3,251.9 million in March 2022, but are now worth $16,648.2 million, a jump of almost 412%.

Cash and cash equivalents/(short-term investments + other current assets)

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Cash and cash equivalents/(short-term investments + other current assets)

Cash and cash equivalents/(short-term investments + other current assets) (Looking for alpha)

To compare Alibaba’s balance sheet efficiency, we can perform the following simple calculation. If we divide cash and cash equivalents by the sum of short-term investments and other current assets, we have values ​​of almost 1.47 in March 2021, 0.58 in March 2022, and 0.38 in the latest report. recent. The amount of cash and cash equivalents has clearly decreased relative to the amount of assets and investments convertible to cash within a year. This raised the question of liquidity, as to why the company requires significantly more assets and investments when its net income and free cash flow have drastically decreased. Obviously this is either a poor investment strategy, or there was a problem with the ability to convert your assets into cash.

Cash and cash equivalents / Accrued expenses

Cash and cash equivalents / Accrued expenses

Cash and cash equivalents / Accrued expenses (Looking for alpha)

The sudden increase in accrued expenses may present a short-term challenge to Alibaba’s operations. These costs are recorded on the books when they are incurred, rather than when they are paid. As a result, they are often referred to as accrued liabilities because they are financial obligations that the company must pay. According to Alibaba’s balance sheet, cumulative expenses increased from $5,851.8 million in March 2022 to $39,635.1 million in the most recent report, an increase of 5.77 times. Now, dividing cash and cash equivalents by accumulated expenses yields values ​​of around 9.80 in March 2021, 5.12 in March 2022, and 0.67 in March 2023. In a nutshell, Alibaba had almost Ten times the ability to pay off its financial obligations in March 2021. But it lacks the cash to do so today. This could lead to future financial difficulties for Alibaba, forcing them to liquidate their assets to meet their financial obligations. Not only that, but we need to be concerned about the liquidity of your short-term investments and other current assets, as these are the main sources of funds to pay off your debts.

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Alibaba Rating

Alibaba Valuation Multiples

Alibaba Valuation Multiples (Looking for alpha)

In terms of valuation multiples, Alibaba has been fairly evaluated against its peers, as its stock market price recently fell to $63 a share. According to discounted cash flow models, BABA stock is also undervalued, which is relatively accurate given that its free cash flows have been positive for years. Therefore, this could be a risky barrier if we want to short this stock.

conclusion

Given the turnover of cash and cash equivalents, Alibaba has not been efficient in the use of its operating expenses in recent quarters and has a disorganized balance sheet with an excessive number of assets and investments. The amount of cash and cash equivalents has been in a case of being disproportionate to the amount of current assets and short-term investments. So Alibaba either has a poor investment strategy or is having a hard time converting its assets into cash. In addition, the unexpected increase in accrued expenses could complicate Alibaba’s operations in the future. BABA is clearly priced reasonably at the moment because its valuation is relatively undervalued compared to its peers. However, if we want to invest in this stock now, we must be cautious. As such, I would rate this stock a “sell” for now.

Editor’s Note: This article was submitted as part of Seeking Alpha’s Top Ex-US Stock Picking Competition, which runs through November 7. This competition is open to all users and contributors; Click here to learn more and submit your article today!

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