Is Alibaba A Buy? Stock Analysis

“In the short run, the stock market is a voting machine, in the long term, it’s a weighing machine” Alibaba looks strong but the stock has been pummeled. Is it still a buy 🚀 or shall we run away🏃‍?

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Lets be clear from the beginning. It has been a crazy year for Chinese stocks and specially for Alibaba. The amount of headwind against the stock seems strange and if we only focus on the news, then we can just call it a day. But there’s a silver lining, just bear with me for 5-7 minutes, let me make my case.

A bit of history

Alibaba was founded in 1999 by Jack Ma and 17 friends with a clear purpose, “Alibaba opens sesame for small- to medium-sized companies”. The raised 25 million from Goldman Sachs and Softbank that same year and within 3 years, they were turning a profit.

In 2005 Yahoo made what is probably the only smart decision they made in this millennium and bought 40% of Alibaba for 1 billion USD that turned into 10 in 2014 when $BABA (Alibaba’s ticker) went public at the NYSE and raised almost 22 billion USD.

Since the beginning, Alibaba has been creating a structure that according to them, will allow their business to last more than 102 years. These 102 years are “a statement to the long-term perspective and commitment to sustainable business development.”

A series of acquisitions and spectacular growth has made Alibaba one of the most valuable companies in the world. Alibaba is one of the world's largest retailers and e-commerce companies. In 2020, it was also rated as the fifth-largest artificial intelligence company.

Business Model

The company hosts the largest B2B (Alibaba.com), C2C (Taobao), and B2C (Tmall) marketplaces in the world. It also owns AliExpress, Lazada, Freshippo, Alimama, Alibaba cloud, HiChina (the GoDaddy of China) and more:

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Their Annual Active Consumers (AAC) stands at 1.18 Billion people, from which 45 Million were added in the last quarter:

  • 912 Million AAC from China.

  • 265 Million International AAC.

Unlike the usual business-to-consumer approach, Alibaba focuses on being a platform for suppliers to sell products in bulk at wholesale prices to small or medium-sized businesses worldwide, who then resell them for a profit in their domestic markets. But that’s just the one of their verticals, now they have also direct retail, Entertainment, Payment platforms, Logistics, Cloud computing, AI, and more.

They also make investments in companies that might turn out to be very profitable directly or indirectly through partnerships. Some of them are Xpeng (Electric Vehicles), Best Inc (leading integrated smart supply chain and logistics solutions provider), and more.

Financials

Look at the Revenue (in RMB) and Year over Year growth:

  • Revenue and Profit both grow an average of 30-40% YoY.

  • Price/Earning ratio stands at 19.2 which is a steep discount if we compare it to its American counterparts like Amazon or the average Nasdaq PE at the moment that stands at 29.

  • Short Interest has gone down from 4% to a low 1.82%, meaning that there are not many people betting that this stock will go down.

  • Market Cap reached 830 Billion dollars in October 2020 and it has gone down to 434 Billion dollars by the September 2021.

The stock reached a high of 319.32 USD but is now close to its 52-wk low of 152.80.

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What happened?

Well, A few things:

  1. Jack Ma made the “mistake” of criticizing the Chinese government in November of 2020.

  2. Xi Jinping put a stop to what was suppose to be the biggest IPO ever of which Alibaba is a big shareholder. Ant Group that holds the biggest payment platform in China (Alipay, Huabei and others) was not allowed to go public and now in September 2021, the Chinese government decided that Ant group must break up its business units and create a separate app for the fintech giant’s loans business.

  3. China has been cracking down on Gaming, Privacy, Real Estate, etc. and these measures have spooked a lot of institutional investors who have pulled their investments and paper-hands retail investors have follow suit.

  4. The US and China have embarked in a lose-lose commercial cold war that has nothing to do with Alibaba or Chinese ADRs but, as it happens, politicians make everything just harder.

The important part to keep in mind is that the fundamentals and core businesses have remained the same and growing at the same rate. This whole situation reminds me of the Benjamin Graham quote:

“In the short run, the stock market is a voting machine, in the long term, it’s a weighing machine”

It might sound crazy but I believe that all the fears with China have been overblown. Nobody is going delist Chinese stocks! That would be an act of war and would not benefit either party, China will stop making constant reforms (there are not many left anyways) and eventually, retail and institutional investors will flock the Chinese stocks until they are back at a normal valuation.

Price Target

Current Stock Price: 160$

Low Price Target: 192$

Average Price Target: 270$

High Price Target: 336$

Nobody can predict the future but If I was looking to beat the market in the next 12 to 18 months, my eyes would be set in looking for event-driven price undervaluation, high growth companies with a lower PE ratio than its peers, low debt and good margins.

And that’s it folks, Until next time!

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