Alibaba Group Holding Ltd

Alibaba Group Holding Ltd (NYSE: BABA) is a provider of marketing reach and technology infrastructure to help brands, merchants and other businesses to engage with customers and users.

Investment Highlights - Alibaba Group Holding Ltd – Expensive at USD 243.46

• Despite the improvement in revenue in the first half of the financial year 2021, the Company’s liquidity position declined and an increase in the operating expenses in the covid-19 era.
• In the last three months, the Company delivered a negative return of ~21.42% and delivered lower returns compared to the benchmark Index.
• As per valuation metrics, Price/Earnings multiple of the Alibaba Group Holding Ltd is currently higher as compared to the corresponding multiple of the Software & IT Services industry, reflecting overstretched valuations.
• From the technical standpoint, 14-day RSI is supporting downward movement (around 57 level), which means the stock price could decline in the short term.

Key Risks

• The Company’s performance is impacted by risks related to market trends, political change and change in the policies of regulatory authority.
• The disruptive technology trends and cybercrimes also impose a risk to the business model.

Financial Highlights – Q2 & H1 FY2021 (30 September 2020) (released on 5 November 2020)

(Source: Quarterly Report, Company Website) 

• In the second quarter and first half of the financial year 2021, driven by continued growth from the commerce business, the revenue for the period increased.
• The profitability for the period was impacted by higher cost of revenue and increased operating expense in the Q2 FY2021.
• The cash balance as on 30 September 2020 declined to RMB 301,509 million (31 March 2020: RMB 330,503 million).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has reported a lower financial performance in the second quarter of the financial year 2021. Despite the higher revenue, the bottom-line performance declined. BABA needs to manage operating expenses more effectively unless it will further impact the profitability margins in the future period. The liquidity position for the period also declined, while the balance sheet remained well-positioned. At present, the Company is not able to provide any guidance of FY2021 and will continue to monitor the situation and expects to see improvement in the effect of scale and operational efficiencies. The stock made a 52-week low and high of USD 169.95 and USD 319.32, respectively.

Based on the factors as highlighted above, we believe the stock of Alibaba Group Holding Ltd is “Expensive” at the closing price of USD 243.46 (as on 15 January 2021), with support from few catalysts needs to be evaluated at a later stage such as improvement in trading after easing in lockdown restrictions.

International Game Technology Plc

International Game Technology Plc (NYSE: IGT) is a Travel & Leisure Company offering technology products and services across the gaming market.

Investment Highlights - International Game Technology Plc – Expensive at USD 17.95

• The Company’s operations were significantly impacted by the covid-19 pandemic in the US, Italy, and the rest of the world due to travel restrictions, adoption of remote working and gaming venue closures.
• In the last 1 week, the Company delivered a negative return of ~3.60% and delivered lower returns compared to the benchmark Index.
• As per valuation metrics, EV/Sales, Price/Cash Flow and Price/Book Value multiples of the International Game Technology Plc are currently higher as compared to the corresponding multiple of the Hotels & Entertainment Services industry, reflecting overstretched valuations.
• From the technical standpoint, 14-day RSI is supporting downward movement (around 58 level), which means the stock price could decline in the short term.

Key Risks

• To meet the new regulations, the Company needs to implement new processes, failing to do so would increase the compliance risk.
• The business performance is subject to uncertainties related to change in consumer trends, rapid technical innovation, and cybersecurity risk.

Financial Highlights – Q3 & 9M FY2020 (30 September 2020) (released on 12 November 2020)

(Source: Quarterly Report, Company Website) 

• In the third quarter and nine months period of the financial year 2020, due to lower service and product revenue, the total revenue declined.
• Due to lower revenue and negative impact of foreign exchange, the profitability declined significantly and reported a loss for the period.
• The cash balance as on 30 September 2020 increased to $943,346 thousand (31 December 2019: $662,934 thousand).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow (NTM) (Illustrative)

Conclusion

The Company has shown a significant decline in financial performance in the third quarter and nine months period of the financial year 2020. Both the top-line and the bottom-line performance declined, while profitability remained in the negative zone. IGT operations were significantly impacted by the outbreak of covid-19 pandemic and have been focusing on strengthening its balance sheet and return with capital discipline. Presently, the Company is trading near a 52-week high, raising doubts at its upside potential at the current price point. The stock made a 52-week low and high of USD 3.59 and USD 18.93, respectively.

Based on the factors as highlighted above, we believe the stock of International Game Technology Plc is “Expensive” at the closing price of USD 17.95 (as on 15 January 2021), with support from few catalysts needs to be evaluated at a later stage such as improvement in trading after easing in lockdown restrictions.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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