Amazon And Alibaba: Buy One Before Earnings

Summary:

  • Chinese tech stocks are up 70% in the last two months, and Alibaba is up 80%.
  • The end of the regulatory crackdown and China reopening in 2023 is a strong tailwind for growth.
  • Both BABA and Amazon are dirt cheap and could potentially deliver 2X to 3X returns within two years and 3X to 5.3X within five.
  • However, one of these companies has a stronger balance sheet, is growing 2X to 4X faster than the other, and has 50% better risk management.
  • One is 55% undervalued, trading at a lower cash flow and cash-adjusted multiple, and is the most undervalued it’s ever been.

Dollar sign. American money. Cash background, us bill. Money fal

Nature/iStock via Getty Images

This article was originally published on Dividend Kings on Wed, January 25th, 2023.

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2022 was a terrible year for growth stocks that suffered a one-two-punch of the fastest interest rate increases in 40 years and

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Portfolio Visualizer Premium

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Ycharts

Year Sales Free Cash Flow EBITDA EBIT (Operating Income) Net Income
2022 $126,591 $16,438 $23,477 $10,334 $9,194
2023 $129,739 $11,153 $25,392 $14,281 $8,917
2024 $144,747 $20,783 $28,929 $17,994 $16,340
2025 $159,815 $26,006 $32,534 $22,800 $19,097
2026 $176,300 $28,544 $37,888 $27,343 $22,918
2027 $181,484 NA $50,403 $36,151 $28,131
2028 $194,549 NA $57,620 $42,387 $33,150
Annualized Growth 2022-2028 7.42% 14.79% 16.14% 26.52% 23.83%
Cumulative 2023-2028 $986,634 $86,486 $232,766 $160,956 $128,553

Year FCF Margin EBITDA Margin EBIT (Operating) Margin Net Margin
2022 13.0% 18.5% 8.2% 7.3%
2023 8.6% 19.6% 11.0% 6.9%
2024 14.4% 20.0% 12.4% 11.3%
2025 16.3% 20.4% 14.3% 11.9%
2026 16.2% 21.5% 15.5% 13.0%
2027 NA 27.8% 19.9% 15.5%
2028 NA 29.6% 21.8% 17.0%
Annualized Growth 2022-2028 5.67% 8.11% 17.78% 15.27%

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(Source: FactSet Research Terminal)

Metric Historical Fair Value Multiples (9-Years) 2022 2023 2024 2025

12-Month Forward Fair Value

Operating Cash Flow 21.08 $176.65 $169.69 $235.67 $182.97
Average $176.65 $169.69 $235.67 $182.97 $174.77
Current Price $119.44

Discount To Fair Value

32.39% 29.61% 49.32% 34.72% 31.66%
Upside To Fair Value 47.90% 42.07% 97.32% 53.19% 46.32%
2023 OCF 2024 OCF 2023 Weighted OCF 2024 Weighted EPS 12-Month Forward OCF 12-Month Average Fair Value Forward P/OCF

Current Forward P/OCF

$8.05 $11.18 $7.43 $0.86 $8.29 21.1 14.4

Analyst Median 12-Month Price Target

Morningstar Fair Value Estimate

$146.01 (17.6X cash flow) $177.00 (21.4X cash flow)

Discount To Price Target (Not A Fair Value Estimate)

Discount To Fair Value

18.20% 32.52%

Upside To Price Target

Upside To Fair Value

22.25% 48.19%

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FAST Graphs, FactSet

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FAST Graphs, FactSet

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Statista

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(Source: FactSet Research Terminal)

Company Cloud Computing Sales Growth Through 2028 Cloud Computing Market Share
Amazon 16.4% 40.2%
Microsoft 13.4% 32.0%
Alphabet 18.7% 14.7%
Alibaba 5.6% 2.6%

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Charlie Bilello

Classification S&P LT Risk-Management Global Percentile

Risk-Management Interpretation

Risk-Management Rating

BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL 100 Exceptional (Top 80 companies in the world) Very Low Risk
Strong ESG Stocks 86

Very Good

Very Low Risk

Foreign Dividend Stocks 77

Good, Bordering On Very Good

Low Risk

Ultra SWANs 74 Good Low Risk
Dividend Aristocrats 67 Above-Average (Bordering On Good) Low Risk
Low Volatility Stocks 65 Above-Average Low Risk
Master List average 61 Above-Average Low Risk
Dividend Kings 60 Above-Average Low Risk
Hyper-Growth stocks 59 Average, Bordering On Above-Average Medium Risk
Dividend Champions 55 Average Medium Risk
Monthly Dividend Stocks 41 Average Medium Risk
Alibaba 41 Average, Bordering On Below-Average Medium Risk

Rating Margin Of Safety For High-Risk 9/13 Above-Average Speculative Companies 2023 Fair Value Price 2024 Fair Value Price 12-Month Forward Fair Value
Potentially Reasonable Speculative Buy 0% $169.69 $235.67 $174.77
Potentially Good Buy 35% $110.30 $153.19 $113.60
Potentially Strong Buy 45% $93.33 $129.62 $96.12
Potentially Very Strong Buy 55% $49.64 $106.05 $78.65
Potentially Ultra-Value Buy 65% $59.39 $82.49 $61.17
Currently $119.44 29.61% 49.32% 31.66%
Upside To Fair Value (Including Dividends) 42.07% 97.32% 46.32%

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FactSet Research Terminal

Company Cloud Computing Sales Growth Through 2028 Cloud Computing Market Share
Amazon 16.4% 40.2%
Microsoft 13.4% 32.0%
Alphabet 18.7% 14.7%
Alibaba 5.6% 2.6%

Year FCF Margin EBITDA Margin EBIT (Operating) Margin Net Margin
2022 -2.8% 13.8% 2.4% -0.2%
2023 3.5% 14.6% 3.9% 3.2%
2024 6.8% 16.1% 6.1% 4.9%
2025 8.6% 17.2% 7.7% 5.8%
2026 11.3% 19.7% 9.5% 7.6%
2027 13.6% 20.9% 10.9% 8.9%
Annualized Growth 2022-2027 40.70% 8.64% 35.47% 29.54%

Year Sales Free Cash Flow EBITDA EBIT (Operating Income) Net Income
2022 $510,594 -$14,398 $70,664 $12,223 -$1,027
2023 $559,852 $19,367 $81,579 $21,863 $17,772
2024 $638,492 $43,691 $103,096 $38,775 $31,594
2025 $719,939 $62,202 $124,120 $55,515 $41,931
2026 $807,828 $91,029 $158,845 $76,500 $61,676
2027 $906,995 $122,955 $189,977 $99,061 $81,083
Annualized Growth 2022-2027 12.18% 58.73% 21.87% 51.97% 46.15%
Cumulative 2022-2027 $3,633,106 $339,244 $657,617 $291,714 $234,056

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(Source: FactSet Research Terminal)

Year SG&A (Selling, General, Administrative) R&D Capex Total Growth Spending Sales Growth Spending/Sales
2022 $50,840 $67,752 $60,755 $179,347 $510,594 35.13%
2023 $54,451 $74,110 $59,704 $188,265 $559,852 33.63%
2024 $61,102 $83,372 $60,801 $205,275 $638,492 32.15%
2025 $65,963 $86,842 $61,956 $214,761 $719,939 29.83%
2026 $71,104 $95,455 $62,312 $228,871 $807,828 28.33%
2027 $75,844 $103,275 $63,118 $242,237 $906,995 26.71%
Annualized Growth 8.33% 8.80% 0.77% 6.20% 12.18% -5.33%
Total Spending 2022-2027 $328,464 $443,054 $307,891 $1,079,409 $3,633,106

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(Source: FactSet Research Terminal)

Metric 2022 2027 Annualized Growth Rate
EPS $1.77 (2023) $7.61 44.0%
Operating Cash Flow Per Share $4.60 $16.49 29.1%
Free Cash Flow Per Share $0.88 $11.68 59.8%

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential
Amazon 0.0% 19.2% 19.2%
ZEUS Income Growth (My family hedge fund) 4.1% 8.5% 12.6%
Schwab US Dividend Equity ETF 3.4% 8.6% 12.0%
Vanguard Dividend Appreciation ETF 1.9% 10.0% 11.9%
Nasdaq 0.8% 10.9% 11.7%
Dividend Aristocrats 1.9% 8.5% 10.4%
S&P 500 1.7% 8.5% 10.2%
REITs 3.9% 6.1% 10.0%
Alibaba 0.0% 8.7% 8.7%
60/40 Retirement Portfolio 2.1% 5.1% 7.2%

Classification S&P LT Risk-Management Global Percentile

Risk-Management Interpretation

Risk-Management Rating

BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL 100 Exceptional (Top 80 companies in the world) Very Low Risk
Strong ESG Stocks 86

Very Good

Very Low Risk

Foreign Dividend Stocks 77

Good, Bordering On Very Good

Low Risk

Ultra SWANs 74 Good Low Risk
Amazon 68 Good Low Risk
Dividend Aristocrats 67 Above-Average (Bordering On Good) Low Risk
Low Volatility Stocks 65 Above-Average Low Risk
Master List average 61 Above-Average Low Risk
Dividend Kings 60 Above-Average Low Risk
Hyper-Growth stocks 59 Average, Bordering On Above-Average Medium Risk
Dividend Champions 55 Average Medium Risk
Monthly Dividend Stocks 41 Average Medium Risk
Alibaba 41 Average, Bordering On Below-Average Medium Risk

Metric Historical Fair Value Multiples (14-Years) 2022 2023 2024 2025 2025

12-Month Forward Fair Value

Operating Cash Flow 25.98 $123.66 $204.46 $273.57 $293.31 $368.66
Average $123.66 $204.46 $273.57 $293.31 $368.66 $209.78
Current Price $92.51

Discount To Fair Value

25.19% 54.75% 66.18% 68.46% 74.91% 55.90%
Upside To Fair Value 33.68% 121.02% 195.72% 217.06% 298.50% 126.76%
2023 OCF 2024 OCF 2023 Weighted OCF 2024 Weighted OCF 12-Month Forward OCF 12-Month Average Fair Value Forward P/OCF Current Forward P/OCF

Current Forward Cash-Adjusted PE

$7.87 $10.53 $7.26 $0.81 $8.07 26.0 11.5 13.0

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(Source: FAST Graphs, FactSet)

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(Source: FAST Graphs, FactSet)


Disclosure: I/we have a beneficial long position in the shares of AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DK owns AMZN in our portfolios.


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