Chinese stocks have been put through the wringer recently, and Alibaba is no exception. This blog briefly explores Alibaba and whether it presents a fair value at this price.
Please note that any information supplied on this website is for entertainment purposes only and should not be taken as financial advice. Any reader should do their own research and/or consult with a qualified financial advisor.
Alibaba is down around 80% from its peak as of the time of writing. Charlie Munger describes his BABA investment as “…one of the worst mistakes I ever made”. He invested at around a cost basis of $171 – the stock trades at around $70 per share as of the time of writing.
The Business
Alibaba is an e-commerce platform, known in particular for B-2-B – supplying businesses with inventory. Essentially, it connects the world’s factory (China) to other markets via its online platform.
China is currently going through a difficult transition in its history. If it wasn’t obvious, the lockdowns exposed how critical China was in the supply chain, so many companies are prudently attempting to avoid over-reliance on the country. Furthermore, the political landscape in China makes it more challenging for companies to operate freely.
The Chinese economy also has its share of challenges with regard to demographics, growth and
As so much of Alibaba’s revenues (around 70%) are derived internationally, the way companies view China is an important qualitative factor in determining whether it will be investible over a long period. The sectors of the business are as follows:
- China Commerce
- International Commerce
- Local Consumer Services
- Cainiao
- Cloud
- Digital Media and Entertainment
- Innovation Initiatives and Others
Financials – Why I am Excited
I don’t want to dwell on these matters for too long, as I believe that China, although it has some real economic challenges, will continue to grow at a modest rate.
Bearing this in mind, why does Alibaba present such incredible value at its current valuation? I must admit, that qualitative factors make Alibaba look horrible as an investment, but the quantitative factors are simply too good to ignore.
Its current market cap is around 175 billion dollars. Its net income is around 14 billion, which means that its current PE ratio is around 12.5. It has around 6.5 billion in amortisation, depreciation, and depletion, which takes down its profit significantly, but its free cashflows, which are far more difficult to distort is where Baba truly excels. Its trailing twelve-month free cash flows were around 26 billion.
This means the trailing twelve-month free cash flows were only 8 times less than its current market cap. The risk-reward proposition for Alibaba therefore, seems quite attractive, even though it has some business issues.
A Growing Dividend and Stock Repurchases
Alibaba has a small dividend of around 1.4%. This only represents a small amount of its available free cash flow (around 11%). This yield has room to grow and is sustainable. Overall, Alibaba, not only represents excellent value – it could also be an impressive dividend growth stock.
Although its margins have been squeezed in recent years, and segments of its business have suffered considerably, it seems to present intriguing value over a long investment timeline.
If Alibaba were able to improve its operating margins by any significant amount, grow its internal market revenue, and continue issuing dividends and stock repurchases, it would represent an excellent value over the next 5 to 10 years.
Investing a Slightly Less Risky Way
In conclusion, for those hesitant to directly invest in Alibaba, an alternative route could be considering an emerging market ETF.
This approach not only provides exposure to Alibaba but also offers diversification across various emerging market assets. Moreover, it may mitigate the risks associated with Alibaba’s heavy reliance on international business.As for myself, while I currently hold 87 shares in Alibaba and may consider increasing my position, I also maintain a significant investment in an emerging market ETF, reflecting a balanced approach to portfolio management.
