by winston » Thu May 30, 2019 2:05 pm
not vested
Alibaba (BABA)
Growth Stocks to Buy That Are Growing Into Their Valuation: Alibaba (BABA)
Forward P/E Multiple 5 Years Ago: 45
Current Forward P/E Multiple: 24
Stock Price % Gain Past 5 Years: 71%
Most Recent Quarter Revenue Growth Rate: 51%
The stock has risen dramatically over the past five years (over 70%) despite the multiple being nearly cut in half during that time.
Sounds a lot like Amazon, right? It does. But, the narratives actually couldn’t be more different. Over at Amazon, it was slower revenue growth and robust margin ramp that produced huge profit growth and enabled multiple compression.
At Alibaba, it has been the exact opposite. Margins have actually struggled. But, revenue growth has consistently remained north of 50%. Thus, robust revenue growth has driven robust profit growth, and that has enabled multiple compression.
The problem here is that the law of large numbers states that revenue growth will naturally slow over time. Quite simply, 50%-plus revenue growth isn’t sustainable forever. Thus, as that revenue growth rate comes down, Alibaba is going to need margin expansion drivers to power robust profit growth to continue this dynamic of Alibaba stock growing into its valuation. Right now, those margin drivers are nowhere to be found.
But, they won’t be missing forever. Most of the margin compression over at Alibaba is a result of growth-related investments. Once the company stops growing at a 50%-plus rate, Alibaba will pull those growth-related investments because they won’t be necessary anymore.
That will provide an immediate lift to margins. Then, the company’s new businesses in cloud and offline retail will scale, which will create recurring tailwinds for margins.
Overall, then, Alibaba is still in the early stages of growing into its valuation. Over the next several years, revenue growth will slow and margins will ramp, creating a healthy dynamic for further gains in BABA stock.
Source: Investor Place
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