Alibaba Group Holding (NYSE:BABA), Decline or Opportunity after the Antitrust Ruling

Alibaba Group Holding Limited's ( NYSE:BABA ) stock price has been in steady decline, down 32% since the high in October.

There seem to be a few developments that are responsible for the change in investor sentiment and the pulling out from some large institutions.

Alibaba was the subject of an antitrust ruling and a fine of US$ 2.8 billion, which the company has agreed to pay and adhere to. This might seem like a major setback at present, but the more pertinent question is “How much will this influence the company’s future? ”

Looking at Alibaba’s current cash balance of US$ 75 billion (CNY 483 billion), it seems that they are capable of taking the hit without it having a major impact on operations.

On the downside, the antitrust hit signals a change of the regulatory authorities towards Alibaba and other technology companies.

The other reason investors are weary, is the guidance drop for 2022 and the fact that management has pledged to heavily reinvest profits to strengthen current and new operations.

As disheartening as this is for investors, the move of management might actually be great for the growth of the company. Alibaba is still in a great position to keep ahead of competitors such as JD.com ( NasdaqGS:JD ) and Pinduoduo Inc ( NasdaqGS:PDD ) because of its current market dominance.

This might not be the case in the future and is a good reason for Alibaba to solidify its current position.

Now let's look at how Alibaba was performing thus far, in order to get an appropriate sense of the potential for the future.

Strong Revenue Generation Capacity, Which Might Be Underestimated By Investors

Alibaba's solid fundamental position reveals both a profitable and growing giant. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Alibaba Group Holding

NYSE:BABA Earnings and Revenue History, June 2021

Zooming In On Alibaba Group Holding's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period.

To get the accrual ratio, we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period.

This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2021, Alibaba Group Holding had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of CN¥232b in the last year, which was a lot more than its statutory profit of CN¥150.3b. Alibaba Group Holding's free cash flow improved over the last year, which is generally good to see.

That might leave us wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

With a great accrual ratio, Alibaba is well positioned for the large investment expenditures it plans for the future. A good way to look at this is not profits leaving the company, but an investment in even more future growth.

Conclusion

Alibaba is pressed between regulatory and competitive tensions, and it appears to be taking the route of adjusting and rebuilding. This seems like the better move and something that will ensure a long term future for the company.

There may be even more internal shakeups, but the company itself is on solid ground.

As for the fundamentals, Alibaba Group Holding's accrual ratio is solid, and indicates strong free cash flow.

Of course, we've only just scratched the surface when it comes to analyzing its potential, one could also consider margins, forecast growth, and return on investment, among other factors.

Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.

Today, we've zoomed in on a single data point to better understand the nature of Alibaba Group Holding's profit.

But there is always more to discover.

For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.