In the story “Ali Baba and the 40 Thieves,” the magic words “open sesame” give a poor woodcutter access to a chamber of treasures. The story was re-enacted again when the Chinese e-commerce company, Alibaba Group Holding Ltd. (BABA.N), staged the biggest IPO in history, raising $25 billion. We check the magic words on social media and evaluate its investment profile.
In anticipation of the IPO, investors hit social media with an average of 8,000 tweets per day. Using our Eikon Social Media Monitor app, we are able to track investors’ opinions on Twitter when Alibaba’s ticker symbol ($BABA) is mentioned in a tweet.
Twitter volume jumped on the first day of trading, Sept. 19, ranging from 1,500 to 11,500 tweets a day. BABA’s sentiment was positive before and during its IPO. The stock opened at $92.70 shortly before noon ET on the first day and quickly rose to a high of $99.70, before paring gains to close at $93.89, as this Reuters story reported. Even post-IPO, the stock is receiving about 2,500 tweets per day.
Source: Eikon
Checking fundamentals
We looked at several of the StarMine models to see if Alibaba as an investment is more solid than smoke from Aladdin’s lamp. We found that it ranks in the top percentiles of all companies in its region under StarMine’s Earnings Quality (EQ) and Credit Risk – Text Mining models.
Source: Deals Intelligence
Sustainable sources
Alibaba scores a 97 out of a possible 100 on the StarMine Earnings Quality Model, underlining that its profits remain of high quality and are more likely to be sustained in upcoming quarters. The model looks at different components including operating efficiency and cash flow.
Source: Eikon
Cash flow picture
From the graph below, it is evident that Alibaba’s earnings are backed by strong cash flows. What’s more, net income and cash flow continue to grow, for the most part.
Source: Eikon
What does Wall Street say?
With StarMine’s Credit Risk – Text Mining model we are able to analyze transcripts, Reuters news, filings and research to identify companies likely to experience default. The implied rating here is an AAA, and the overall model score is 100, placing the company in the top percentile for companies within its region.
Similarly, the overall score on the company’s recent broker research is a healthy 70 out of 100, with four of the most recent documents ranking 8 or higher out of 10. Those scores point to particularly bullish language used by analysts and might well put a potential investor at ease.
Source: Eikon
Stock value
So is this newly-public stock a good value? Our StarMine Intrinsic Valuation model accounts for the systematic biases that our research team found in sell-side estimates. Namely, the faster the expected growth rate, the more optimism bias. And, farther out estimates are more optimistically biased than nearer ones. The strong tendency of rapid growth rates to revert to the mean is frequently underestimated, which is especially problematic when attempting to value growth stocks.
For Alibaba, after adjusting FY1, FY2, FY3-FY5 and LTG estimates for optimism bias, StarMine’s Intrinsic Valuation model arrives at a forward 10-year compound annual growth rate (CAGR) of 14.8%, calculating fair value at $45/share, about half of its current level.
Source: Eikon
Bright future?
Plugging in today’s price and solving for growth suggests that investors are optimistic. Alibaba’s market implied 10-yr CAGR is 22.3%. Perhaps Wall Street is expecting more magic from the chamber of treasures.
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