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Proprietary Data Insights Financial Pros’ Top Chinese Stock Searches in the Last Month
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Should You Hold Alibaba (BABA)? |
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Alibaba (BABA) has grown 20% per year on average for the last five years. Over the last decade, it’s been 33.5%. At $90 a share, the stock is well off its all-time high of $319 in late 2020. Yet, the stock is up just 30% from when it went public in late 2014. Chinese government crackdowns made foreign investors extremely wary. Only recently has management deployed the nearly $100 billion in cash on its balance sheets for share buybacks and dividends. That’s caught the interest of financial pros who searched out this stock more in the past month than any rolling 30-day period in the past year. So is this stock a dirt-cheap bargain or a value trap? Alibaba’s Business Alibaba is a name that’s been making waves in the global tech scene. As China’s largest e-commerce company, Alibaba has created a massive ecosystem that brings together businesses and millions of consumers from all over the world, offering a one-stop-shop for online and mobile commerce, cloud computing, digital media, and more. So, what’s Alibaba all about? Imagine if Amazon, eBay, and Google Cloud had a baby – that’s kind of like what Alibaba is for China and beyond. For example, Taobao, one of Alibaba’s platforms, is like China’s version of Amazon, while Tmall is similar to a mega-mall filled with big-name brands. And if you’re a business looking to expand globally, Alibaba.com is the go-to wholesale marketplace that connects buyers and sellers from over 190 countries – that’s almost every country in the world! Now, let’s break down how Alibaba makes its money:
Despite Alibaba’s impressive growth and dominant market position, it often finds itself hamstrung by Chinese government regulators. The tech giant has been a primary target in the government’s crackdown on private enterprises, including antitrust investigations, fines, and forced restructuring. In 2021, Alibaba was fined a record $2.8 billion for anti-competitive practices and forced to split into separate legal entities. Moreover, Jack Ma, Alibaba’s charismatic founder, has largely disappeared from public view since criticizing China’s regulatory system in late 2020. As a result, Chinese stocks trade at a significant discount to similar global companies. Financials
Source: Stock Analysis Alibaba has been incredibly successful expanded its business. However, that has come at a cost to its margins in recent years. Diversification into logistics, food delivery, and cloud computing in 2017 to 2018 hit gross margins. In 2021, the acquisition of Sun Art hypermarket added a new low-margin business line. Nonetheless, Alibaba has managed to churn out incredible amounts cash at $25 billion from operations annually. Yet, the company only spends $5 billion on Capex and between $2.5 billion to $5 billion on acquisitions annually. They generate so much money that they invest $15 billion annually in securities. Thankfully, they’ve started to give $15 billion annually back to shareholders, an astounding 7.0% yield. Valuation
Source: Seeking Alpha Despite its phenomenal growth, healthy balance sheet, and generous cash returns, Alibaba trades at just 15x forward earnings and 8.5x operating cash flow. That’s in line with many Chinese companies, though higher-growth entities like Li Auto (LI) and Pinduoduo (PDD) can trade at higher multiples. But to give you an idea of the China discount, Amazon trades at 40x forward earnings and 19x operating cash flow. Growth
Source: Seeking Alpha Amazon is a good point of comparison because it’s seen revenue growth comparable to BABA over the last five years. Yet, it has performed better with earnings and free cash flow growth. So, it makes sense that Alibaba would trade at a discount to Amazon. But does 50% of the value make sense? Profitability
Source: Seeking Alpha Except for gross margin, Amazon’s margins are in fact lower than Alibaba’s. Compared to its peers, Alibaba is quite profitable. Yet, its decline in profitability has limited its equity, assets, and total capital returns.
Our Opinion 7/10 We’ve been fairly bearish on Alibaba in the past. However, it’s now at a point where the value starts to make sense, provided they continue returning cash to shareholders. With a 7% yield on such heavy revenue growth, it’s hard to ignore the stock. Nevertheless, it should be approached with caution, given the geopolitical risks. |
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