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ALIBABA
We’ve all heard the story of Alibaba and the 40 Thieves. In the original version of the story, Ali Baba discovers the secret of a thieves' treasure den, and enters it with the magic phrase "open sesame". When the thieves try to kill Ali Baba, his faithful slave-girl foils their plot, and kills the thieves instead. Ali Baba then ends up keeping the secret of the treasure.
The number 40 is back upon us: Isn’t it ironic that Alibaba has now lost 40% market share since its peak?
Will Alibaba recover and successfully manage to defend itself like the character in the story did? With the help of the original team, I think they can.
If you follow my Investment Scorecard closely, you would have seen that on July 18, I added Alibaba BABA 0.00%↑ as the second entry into Coffee Can 13. More specifically, the purchase included 3 components:
BABA Stock ($76.96/sh)
BABA Dec 2026 77.5 Calls ($19.19/contract)
BABA Dec 2026 80 Calls ($18.20/contract)
Here’s a quick brief about why I chose to buy Alibaba.
Here is how the company describes itself:
With Alibaba, we are getting a market leading business in China, one that benefits from two secular growth markets (eCommerce and Cloud), for just a mid-single digit FCF multiple. That’s unheard of.
It’s highly unlikely that such a business, one that should benefit from AI tailwinds, would be trading at such a low multiple if it were not based in China.
Also, over the next ~6 years, it’s not inconceivable that the business cumulatively generates more free cash flow than its entire current enterprise value!
The business is currently trading at just 5.75x EV/FCF
TTM FCF: $21.6 Billion
Enterprise Value: $124 Billion
Market Cap: $186 Billion ($76.96/share)
Net Cash: ~$62 Billion
No wonder David Tepper thinks Alibaba is the cheapest stock in the world.
Note: China’s e-commerce penetration is one of the highest in the world but it is still at just around 28% of total consumer retail. I was under the impression it was ~50% so I was a little surprised to see this in the letter from their CEO.
Alibaba is About The Future
According to Alibaba’s Chairman and CEO:
“Alibaba is about the future.
In the past 25 years, Alibaba has grown consistently but, unfortunately, acquired “large company” characteristics.
For the next ten years, we see ourselves again as a start-up defined by entrepreneurship, innovation, and our mission “to make it easy to do business anywhere.”
In order to invest in Alibaba today, we must believe the above transformation will in fact work out.
Such a big change starts at the top.
Well, Jack Ma is back and seems to be on the scene in China once again.
He also recently bought $50 million worth of stock.
Joe Tsai is back.
He also recently bought $151 million worth of stock.
Eddie Wu is CEO
It certainly seems like the “old gang is back” to try to reinvigorate the business:
Alibaba has been losing market share, but it still commands a market leading 40% market share. The past year has been a year of self-transformation for Alibaba. The core business has gradually returned to healthy growth: The Taobao and Tmall Group achieved double-digit year-over-year growth in GMV in Q1. Part of this had to do with discounting but it is good to see revenue grew 4.6X faster than the year before (8.3% vs 1.8%).
The cloud business is relatively small but has a high 30s% market share in China. That should help it capitalize on the increasing demand for AI-related products. It is expected that total cloud revenue will accelerate to double digit growth in the second half of next year.
The company has also been returning significant cash to shareholders via dividends and buy-backs:
FY24: $16.5B including US$12.5 billion share repurchase
FY23: $13.4B including US$9.5 billion share repurchase
About 5% of shares outstanding were bought back each of the last 2 years.
Clearly the company believes it is undervalued, and that the business is stable and competitive enough to aggressively return capital to shareholders via buy-backs and dividends (>75% of FCF returned to shareholders!).
Technically speaking, if you look at the monthly chart below, since 2022, pretty much every volume spike has resulted in a green candle, implying the stock may be under accumulation. And with the last couple of months having seen some of the lowest monthly trading volumes ever, it just feels like sellers have left the building, and that we are in the process of bottoming. Just a little bit of demand can move the stock much higher.
Risks To Consider
Of course, any business trading this cheaply has some risks that we must consider.
The market is/has been worried about the following.
Competition:
This is a real risk. Since 2015, market share has gone from ~80% to 40%. We will see whether the new focus on improving user experience, selection, pricing, and customer service can reinvigorate the company. The core business’ recent return to growth is a good first step.
Also, it is unreasonable to expect one company to dominate 80% market share in a market as big, competitive, and lucrative as China eCommerce. I don’t think even Google’s market share is that high.
Cash Will Be Stuck In China:
This risk is a red herring. ADR holders just received some juicy dividends, so clearly cash isn’t stuck in China.
Will China Invade Taiwan?
I try not to worry too much about Black Swan events like this. But this has market participants concerned. If this happens, that will impact many other stocks in the market, not just BABA or Chinese stocks.
Slow Economy:
Housing is impacting consumer confidence. Agreed. But the macro economy should bounce back over time. So in my view, this presents a potential timing risk. But while we wait for the macro conditions to improve, we are benefiting from some aggressive buybacks, and we’re also only paying mid-single digits for the business. The risk-reward seems favourable.
The VIE Structure:
The VIE complicates company ownership. But hey, if the VIE isn’t a deal breaker for folks like David Tepper and Michael Burry, ones with billions to evaluate the risk of such a structure, why should I worry about this?
Here is what I had to say about the VIE in 2021.
In Conclusion:
As you can see, the investment thesis is nothing novel: The company has lost share but I don't believe it is about to fall over and die. As a result, I believe the stock is just too cheap. The company has acknowledged its shortcomings and is actively rectifying things. The company is returning capital to shareholders aggressively. And with the negative sentiment Chinese stocks are facing today, now is a great time to buy-in. It just feels like shareholders who bought over the past few years are frustrated by the multi-year decline in the stock, and are capitulating.
Yes, the market share decline that Alibaba has experienced has been quite significant. But I also believe prices have overshot to the downside.
One thing I have come to appreciate about the stock market is that you don’t need to buy obscure securities to generate a decent return. Even large well known stocks regularly become disconnected from their fair values.
Note:
Since the GoogleFinance function does not support options prices, I wrote a little Google Apps Script to update the Alibaba Options Prices in the Investment Scorecard every 24 hours.
Feel free to email me if you want a copy.
Cheers!
Advanced Micro Devices (AMD)
We’ll discuss AMD another time but I wanted to share that I purchased shares on 7/25/2024 for $142.50/sh.
Why?
In short, the world desperately needs an alternative to NVDA, and this could just be AMD.
And clearly, the company is working hard to stay close with potential customers. A CEO doesn’t make such an appearance unless it’s a top priority for them…
That’s it for today.
Happy Investing!
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