Chinese ADRs are extremely popular investment options for U.S. investors, with no company attracting more attention than Alibaba (BABA - Free Report) . The e-commerce behemoth is, of course, one of the largest publicly-traded tech companies in the word, but the popularity of the stock also comes from its use as method to gauge the health of China’s economy and invest in its consumer marketplace.
Alibaba is a dominant force in global retail and an exciting growth pick in industries like financial services, smart vehicles, artificial intelligence, and digital media. Considering the company’s expansion opportunities and rising popularity among investors, it makes sense that the stock has soared a remarkable 57% over the past year—making it one of Wall Street’s hottest options.
But this strong momentum has also stretched Alibaba’s valuation, adding some of the risk that typically comes alongside high-growth investing. The stock is trading with a Forward P/E of about 25, which is a noticeable premium to the broader market average. What’s worse, BABA’s P/S of 12.8 and P/B of 6.6 are in runaway territory.
To traditional value investors, these ratios make BABA look like an expensive stock—one that the market is overvaluing compared to the company’s actual earnings, revenue, and book value.
In contrast, these investors consider “cheap” stocks to be those that offer better bang for their buck in terms of these financial metrics. After all, buying a stock makes one a partial owner of that company, so investors are inherently interested in these measureable fundamentals.
There are plenty of investors willing to pay a premium for the unique exposure that Alibaba offers, but there are a few traditionally “cheaper” options that compete with the company in certain markets. Here’s a closer look at two of those stocks.
Baidu, Inc. (BIDU - Free Report)
Baidu is also of China’s largest internet companies, owning a more than 75% share of the country’s search engine market. Here’s a look at its forward 12-month earnings multiple versus that of Alibaba over the past year:
BIDU and BABA have traded with a similar earnings multiple for the better part of a year, but we can see that Baidu is offering a slight discount compared to Alibaba right now. Alibaba bulls would argue that the company deserves its premium, but Baidu is working to break into new growth markets as well.
For instance, Baidu is reportedly in the process of recruiting investors for its wholly-owned finance unit, Baidu Financial Services Group. This unit operates Baidu Wallet, a digital wealth management platform and online credit service. An expansion of this unit would be a direct blow to Alibaba affiliate Ant Financial, which operates the Alipay mobile payments service and offers wealth management and insurance products.
Alipay is frequently cited as one of Alibaba’s key growth opportunities, so the fact that investors can get exposure to a comparable catalyst at a lower valuation might pique the interest of those concerned about maximizing value.
NetEase, Inc. (NTES - Free Report)
NetEase is smaller company with a tighter focus on gaming and digital content, and as we can see, the stock has consistently traded at a significant discount to Alibaba recently:
Alibaba clearly presents a more diversified exposure to the Chinese economy than NetEase, but there is likely another reason that investors would be willing to pay more BABA right now: analyst sentiment.
The Zacks Consensus Estimate for NetEase’s full-year EPS estimates has shed $2.32 within the past 90 days, with 100% agreement to the downside among revising analysts. Overall, analysts now expect the company to witness EPS growth of just 1.2% this year. This negative revision activity has earned NTES a Zacks Rank #4 (Sell).
Each individual investor has their preferred strategies for valuing stocks, and the Chinese internet space is one that sees a number of these theories take precedent. Alibaba’s valuation might be stretched right now, but those that believe in the company’s growth initiatives will say that premium is justified. Either way, investors should note that there is more to the story than the P/E ratio.
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