Question

Looking at Price/Earning Ratio Why is Alibaba undervalued and how will it realize its value?

Answer 1

Company – Alibaba Groups holding

The price to earning ratio is the most commonly used valuation ratio for the industry which the investors for value investing and determine the valuation of the shares.

For Alibaba group the following data is seen

Alibaba Group
Date	P/E ratio
Oct-20	38.94
Nov-20	39.198
Dec-20	38.12
Jan-21	38.1
Feb-21	37.9
Training PE	38.4516

The Average trailing PE of the company is 38.45 in comparison in compassion to the industry of its operation having a higher PE

1	· For Ecommerce and Internet services industry the average PR was found to be 44.34x which is higher due to the presence of higher valued stocks the the index like Amazon dragging the PE of the average industry on a higher side.
2	· As such the share valuation of the Alibaba holdings groups is lower than that of the industry average and investors are hence not willing to pay as high as they are for other peer companies in the same industry .

In order to realize the value and stabilize its PE

· The Price of the share must be at least (Industry PE * EPS ) times the EPS of the alibaba group

· Or the group my consider lowering the EPS by dilution of the outstanding shares by increasing the shares , which will bring down the reported diluted EPS

· Hence the PE of the group will be levered up

Thanks