Why Alibaba Stock Just Dropped
What happened
Shares of Alibaba Group Holding (NYSE: BABA) slid 2.4% in afternoon trading Friday, as of 1 p.m. ET, after two separate investment banks lowered their price targets on the Chinese e-commerce giant in response to a weak earnings report.
So what
For the fiscal third quarter of 2022, Alibaba reported a 10% rise in sales yesterday, which nonetheless fell about $800 million short of analyst forecasts. Earnings were ahead of estimates -- $2.65 per share -- but right now, investors seem more concerned about the deceleration in sales growth.
As TheFly.com reports, Citigroup cut its price target on Alibaba to $200 today, citing Thursday's "mixed" results and the "weak" macro environment and consumer demand in China. Stifel Nicolaus was even harsher, cutting its price target to $135 and warning that Alibaba's "FY22 revenue growth [is going to be] toward the low end of its 20%-23% year-over-year guidance, implying Q4 growth of about 13%," reports TheFly, with continued pressure on profit margins to boot.
Image source: Getty Images.
Now what
All that being said, $200 -- or even $135 a share -- still implies gains of anywhere from 27% to 87% in Alibaba's stock price over the course of the next 12 months. Despite lowering price targets, neither analyst is retreating from its advice to buy Alibaba shares.
Is that the right call? On the one hand, I have to say that Alibaba's current stock price when valued according to generally accepted accounting principles (GAAP) profits -- about 28 times earnings -- doesn't look enticing if all the company can manage is the 10% sales growth it put up last quarter, or the 13% growth Stifel is forecasting this quarter. For that matter, even 20% growth for the full year might not be great, if the profit margin remains slim and earnings don't grow as fast.
On the other hand, free cash flow (FCF) at Alibaba remains robust -- nearly $21 billion in cash profits generated over the past year. At a resulting valuation of less than 14 times FCF, I have to agree with the analysts on this one: Alibaba stock looks more like a buy than a sell.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
