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Critical Comparison: Bank of America Corporation (BAC) vs. Alibaba Group Holding Limited (BABA)

Bank of America Corporation (NYSE:BAC) shares are up more than 1.39% this year and recently increased 0.44% or $0.13 to settle at $29.93. Alibaba Group Holding Limited (NYSE:BABA), on the other hand, is up 1.32% year to date as of 04/16/2018. It currently trades at $174.70 and has returned 2.84% during the past week.

Bank of America Corporation (NYSE:BAC) and Alibaba Group Holding Limited (NYSE:BABA) are the two most active stocks in the Money Center Banks industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect BAC to grow earnings at a 21.53% annual rate over the next 5 years. Comparatively, BABA is expected to grow at a 5.20% annual rate. All else equal, BAC’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 39.61% for Alibaba Group Holding Limited (BABA). BAC’s ROI is 4.80% while BABA has a ROI of 8.70%. The interpretation is that BABA’s business generates a higher return on investment than BAC’s.

Cash Flow



Earnings don’t always accurately reflect the amount of cash that a company brings in. BAC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.90. Comparatively, BABA’s free cash flow per share was +2.56. On a percent-of-sales basis, BAC’s free cash flow was -9.19% while BABA converted 28.51% of its revenues into cash flow. This means that, for a given level of sales, BABA is able to generate more free cash flow for investors.

Liquidity and Financial Risk

BAC’s debt-to-equity ratio is 1.76 versus a D/E of 0.37 for BABA. BAC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BAC trades at a forward P/E of 10.42, a P/B of 1.28, and a P/S of 5.48, compared to a forward P/E of 26.29, a P/B of 8.02, and a P/S of 12.68 for BABA. BAC is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. BAC is currently priced at a -13.87% to its one-year price target of 34.75. Comparatively, BABA is -19.91% relative to its price target of 218.13. This suggests that BABA is the better investment over the next year.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. BAC has a beta of 1.37 and BABA’s beta is 2.52. BAC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. BAC has a short ratio of 1.58 compared to a short interest of 5.81 for BABA. This implies that the market is currently less bearish on the outlook for BAC.

Summary




Alibaba Group Holding Limited (NYSE:BABA) beats Bank of America Corporation (NYSE:BAC) on a total of 7 of the 14 factors compared between the two stocks. BABA is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, BAC is the cheaper of the two stocks on an earnings, book value and sales basis, BABA is more undervalued relative to its price target. Finally, SU has better sentiment signals based on short interest.

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