Alibaba Stock is a Lottery Ticket Investment | Should You Invest?

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In this video, I’ll show you why Alibaba stock isn’t like other investments, why it could realistically go to $500 a share or drop to almost nothing. I’ll share a complete analysis of BABA, along with the valuation and whether you should invest or not.

We’re covering a lot of Alibaba analysis in this one so I’ll leave a clickable index in the description. We’ll start off with the business model and the company’s real competitive advantage over peers. I’ll then walk you through the financial analysis, earnings outlook and Alibaba stock price targets. Finally, I’ll reveal why I call Alibaba a lottery-ticket stock, what it means for investors and whether you should invest.

Alibaba stock is trading for just 10.5-times on a price-to-earnings basis and a price of 1.75-times its expected revenue for the year. To put that into perspective, shares of Amazon at nearly $3,000 each are trading for a price of 60-times earnings and for 2.9-times on that price-to-sales basis.

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And now let’s be clear, I don’t think Amazon is overpriced here either at just under three-times on a price-to-sales basis but even that is still 65% more expensive than shares of Alibaba. On similar price multiples with Amazon, shares of Alibaba would be between $145 to $500 each for as much as a 470% return!

We can also compare Alibaba’s price multiples to its own history. Alibaba has traded for a price-to-sales ratio as high as 14.8-times in 2017 and besides last year, was typically priced around seven- or eight-times its revenue. On a price-to-earnings basis, shares have been as high as 48-times but even that 2020 valuation of 23-times PE would mean a $195 stock price right now.

You see that valuation reflected in the analyst price targets. With 23 analysts pricing the shares, even the lowest target calls for a 45% increase to $135 per share. The average price target of $178 would be nearly double the stock price and one analyst pegs the shares at $250 each in the next year.

With Alibaba though, it’s not a question of valuation, but whether the stock will even be around in five or ten years. Whether it gets delisted from the U.S. market or even if it remains listed, whether something might happen between China and the U.S. that causes shares to implode like we’re seeing with so many Russian companies right now.

That means, Alibaba is very much a lotter-ticket investment. If it remains available to U.S. investors, if it’s able to continue growing without Chinese regulators trying to hobble the company then you’ll see the valuation come back into the shares and this stock is worth at least $383 each based on a five-times sales multiple and $206 billion in 2025 revenue. That’s a 335% return or 62% a year…if the shares are still around for you to sell.

On the other hand, if shares are delisted from the New York Stock Exchange, you would still own the stock but it would likely be traded in Hong Kong and on the OTC exchange here in the United States. Most institutional investors like pensions and wealth managers aren’t allowed to invest in OTC-listed companies so there would be massive selling of the stock and, while it wouldn’t go to zero…it’s very likely this would be a $50 stock or less.

0:00 Alibaba Stock Analysis
1:59 How does Alibaba Make Money?
3:11 Alibaba Stock Financial Analysis
4:52 BABA Stock Earnings and Revenue Outlook
6:12 Alibaba Stock Valuation
6:56 Alibaba Stock Price Forecast
7:43 Why is Alibaba Stock a Lottery Ticket?
11:22 Should I Invest in Alibaba Stock?

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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.