Shares of China's e-commerce giant Alibaba Group Holding (BABA 0.44%) are down more than 60% from their all-time high as of this writing. On this episode of "The Rank," on Motley Fool Backstage Pass, where Fool contributors rank stock buying opportunities, Fool contributors Matt Frankel, Jason Hall, and Jon Quast discuss whether Alibaba stock is a good value stock at this price. This video was recorded on Nov. 29.
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Matt Frankel: With that, we will move onto our No. 8. I think this is one of the ones we disagreed on a little bit sorry I have like 50 windows open. Maybe we disagreed because I ranked it differently than you guys. This was my No. 4 and Jon and Jason ranked this No. 8 and 9. This is Alibaba, which is widely considered the Amazon of China. They have their e-commerce platform, they have a cloud platform. Stock is down 43% year to date, which is pretty mild considering some of the other drops on this list, about 50% off of its all-time high.
The reason is that the recent numbers haven't looked spectacular, to put it mildly. The third quarter, Alibaba's adjusted earnings were down 38%. The e-commerce platform, which is profitable, continued to grow. But if you strip out acquisitions, it only grew by about 16% year over year in terms of revenue, which is not great for growth stock, to put it mildly. The cloud computing platform, which is not profitable, was a stronger growth engine of the two that grew 33% year over year, which was actually an acceleration. Like I said, not profitable, which is why their earnings took a big dive and why the stock took a big dive.
There are some reasons to like Alibaba, which is why I ranked it so high. One, it's like investing in Amazon like 10 years ago. You could argue that it's in the earlier stage of the business cycle than Amazon is. It's still profitable. Even after the hit it took it generated $3.5 billion in free cash flow in the most recent quarter. They're buying stock back aggressively. They have a nice war chest of cash. They have about $69 billion worth of cash compared to about $20 billion in debt. So a lot of that cash that they can deploy in other growth verticals.
Downside is competition is heating up and the margins have been under pressure as a result. JD.com just to name one, Pinduoduo's another that's a big competitor. There's a lot to like and a lot not to like. But I think at the current value, the risk-reward makes a lot of sense for Alibaba, which is why I ranked it as my No. 4. What do you guys think.
Jason Hall: I really struggle with Chinese companies. It's as simple as that. As much as I think there's tons of opportunity in the country. I like to think that the economic arc will be toward capitalism over the very long term. I have real worries with the Chinese government and how large and how powerful is it willing to let its tech giants become? We've already seen [laughs] part of the answer to that is not very.
As much as half a haircut here for this great, wonderful company is true, it's lost half of its value. You could say it's could be China's first true trillion-dollar company, the upside to me for a company that's already so large in China, I just worry about that. I really do. That's why I ranked this large, as low as I did.
Jon Quast: Yes, I think you're right, Jason. If any company is going to have a bullseye on its back from the government, it's going to be Alibaba because it is so big and powerful.
But to Matt's point, it is hard to completely dismiss because on every single valuation metric that you could possibly envision, it is cheap. It is dirt cheap and it's not just cheap, it's an attractive business in a lot of ways, especially for me, the Alibaba Cloud Computing unit. To me that is huge, still growing at an amazing rate and we've seen with Amazon's AWS, that is a very powerful business when done right. That is something that really intrigues me about Alibaba.
Is the government going to leave it alone and let it go [laughs] and let it become that multibagger from here? That is the big uncertainty. One thing that I've never been able to figure out, makes it tough. But the risk reward might be there like Matt points out, it's so cheap. What is the risk at this point of further downside? It seems quite limited compared to the potential reward. I don't know. I could go either way here for sure.
Frankel: If these fundamentals, I think Jason would agree if we're talking these fundamentals from the American business, it would be a different conversation.
Hall: It wouldn't be a conversation because I'd be buying shares.