Alibaba vs. Meituan: quality value against model-based upside

Alibaba and Meituan are two key players in the market, each offering unique advantages. Alibaba has demonstrated better quality-adjusted value, while Meituan boasts a larger model-based upside, sitting at 34.4% compared to Alibaba's 24.2%. However, Alibaba has recently begun to gain ground after a sharp underperformance over the past six months.

The price-to-earnings (P/E) ratios reveal interesting differences. Alibaba is currently trading at a P/E of 24.8x, having moved from a negative value just six months ago. In contrast, Meituan's P/E is an even more negative figure of -10.8x, indicating a loss-making earnings base. This suggests that Meituan's upside potential is largely theoretical at this stage.

Return on equity (ROE) also reveals distinct advantages for Alibaba. With an ROE of 7.1%, Alibaba outperforms Meituan's negative ROE of -21.7%. Additionally, Alibaba demonstrates lower leverage, with a debt-to-equity ratio of 25.4% compared to Meituan's 56.6%. This lower debt level in Alibaba provides a more stable financial footing.

Despite Meituan's larger upside potential, the upside is contingent upon its current loss-making earnings. Consequently, conventional earnings valuation offers little support for Meituan's current valuation. As a result, a long-Alibaba/short-Meituan trade has not yielded favorable results over the past six months. Both stocks are currently exhibiting Strong Sell signals on daily and weekly timeframes.

Meituan's stronger ADX suggests that its downtrend is more entrenched, while Alibaba's weaker momentum remains bearish but less structurally entrenched.

Considering the evidence, Alibaba appears to be the better value candidate, offering durable earnings and solid balance-sheet quality. Meituan, on the other hand, provides greater modeled upside but comes with materially higher earnings and leverage risks. The current outlook for the pairs trade suggests a late-stage phase for Meituan, with a tentative rebound for Alibaba.

However, a confirmed regime change has not yet materialized. The key test will be whether Alibaba can regain its weekly pivot near $118.46, while Meituan remains below its weekly pivot near $20.27.