Stock Analysis by Dr. Harry Hamann (MBA), September 5, 2022

Alibaba Stock in China: now or never?

Alibaba Stock BABA - Now time to buy?

Disclaimer: Please do your research. This analysis is not financial or investment advice and only for entertainment and educational purposes. You are responsible for your actions.

There has been some chatter in the investment community regarding the crash in Chinese tech stocks like Alibaba and Tencent. Of course, this chatter caught my interest, and I started to dig in a bit deeper.

I wanted to understand whether there was an investing opportunity or if it was just noise and I should stay away. Let us look at one specific example: the Alibaba stock in China. I want to analyze price, fundamentals, the business model, and more.

Fear in Chinese Technology Stocks such as Tencent and Alibaba

Key Takeaways


Summary

Alibaba has a monopoly business, shows solid fundamentals, and has an attractive valuation but carries political and regulatory risks. Price dropped over 70%, sentiment is low, and a small long position offers an excellent reward to risk.


Key Points

  • Alibaba is a Chinese e-commerce and technology company with one of the largest online marketplaces focused on small businesses.
  • Alibaba shares are listed in Hong Kong under ticker "9988" and in New York under "BABA".
  • Alibaba went public in 2014, and the IPO price was $68.
  • Jack Ma is the founder of Alibaba and one of the most successful entrepreneurs.
  • Chinese financial markets are less developed and carry political and regulatory risks.
  • The Chinese Communist Party (CCP) is the most powerful political institution in China and affects Alibaba in terms of increasingly strict regulation.
  • Alibaba is similar to Amazon but has a much smaller market cap.
  • BABA's fundamentals look solid, and valuation metrics are low.
  • Alibaba stock has declined over 70% in just a few months. The price is at significant support and trades close to its IPO price.
  • The sentiment in Alibaba shares is terrible. Analysts and investors are scared, but great investors take positions in BABA.
  • An easy and effective way to structure a long position in BABA is by simply buying the physical shares from your broker.
  • Arguably, the lowest delisting risk of BABA is on the Hong Kong Stock Exchange.
  • Small positions (e.g., 1-3%) will protect your portfolio and enable a nice profit upside for long-term investors.
  • Learn how to invest with Financial success at H2 Intel.

1. What is the Business Model of Alibaba Group?

The Alibaba Group Holding Limited is an e-commerce company based in China, Asia, and the company operates one of the world's largest online marketplaces.

Its eCommerce platform specializes in small businesses and allows merchants to sell products directly to buyers through its website. The Alibaba group provides payment processing, customer, and logistics services.

Key statistics: It has over $800 billion in annual revenue, and the company announced it has more than 800 million active buyers in its business. According to yahoo finance, the market value of the equity is over $240 billion (market cap).

Website of Alibaba

How does Alibaba Group Holding Ltd in Asia make money?

They have seven segments in total. Alibaba will take a fee on each transaction if there is trading activity on their marketplace. Also, if sellers want to advertise their products on the platform, Alibaba will also charge for that.

At first glance, the business model seems solid. It sounds like Amazon but with a focus on small businesses. Why shouldn't they make money with this? They operate more or less like a monopoly.

Business Composition

1) China Commerce

Market data shows that over two-thirds of their business comes from the China commerce segment. This segment includes China retail commerce businesses such as Taobao and Tmall.

2) Cloud Computing

The other third of the company comes from several segments, such as Alibaba's cloud computing services. Cloud offers online businesses technology infrastructure and marketing platforms, and Alibaba Cloud is also called Aliyun.

3) International Commerce

International commerce is another business segment with two parts, retail and wholesale commerce (e.g., AliExpress, Alibaba.com).

4) Local Consumer Services

The local consumer services segment includes Amap, a location-based business). Moreover, several other innovation initiatives and services (e.g., marketing platforms) exist.


Still, according to market data, the lion's share of Alibaba Group Holding comes from China's retail and wholesale commerce businesses.

Other segments such as cloud with technology infrastructure, local consumer services segment (e.g., location-based companies), and international commerce segment have roughly the same size in terms of revenue based on market data but are much smaller than the China commerce segment.

In total, there are seven segments. Lastly, Alibaba owns a third of the shares of Ant Group, a fintech arm that holds the most prominent mobile payment platform Alipay.

Alibaba is a Chinese e-commerce and technology company with one of the largest online marketplaces focused on small businesses. China's commerce makes up over two-thirds of its total business.



2. On which stock exchanges is Alibaba listed when was the Initial Public Offering (IPO) of Alibaba, and what was the IPO price?


The shares of Alibaba Group Holding Ltd trade on the Hong Kong Exchange (HKEX) in China under the ticker "9988" and on the New York Stock Exchange (NYSE) in the USA under the symbol "BABA."

Alibaba shares are listed in Hong Kong under ticker "9988" and in New York under "BABA".


The shares of Alibaba Group Holding Ltd went public on the New York Stock Exchange on September 14, 2014, and the IPO price of BABA shares was $68.

IPO of Alibaba: Price Action of first Trading Day

The stock price immediately gapped up 38% on the first day of trading and closed the day at around $94. It was the largest IPO then, and this record was beaten only by Saudi Aramco.

Alibaba went public in 2014, and the IPO price was $68.


3. Who is the founder of Alibaba, and who is the board?

Jack Ma

Jack Ma founded the company in 1999 in China, a former English teacher at Beijing University. He also served as its chairman and chief executive officer (CEO).

Jack Ma is one of China's most successful entrepreneurs. Alibaba announced in 2019 that Jack Ma was stepping down as chairman of Alibaba.

Jack Ma is the founder of Alibaba and one of the most successful entrepreneurs.

The board of Alibaba Group Holding Ltd includes:

  • Joseph Tsai (Executive Vice Chairman)
  • Yong Zhang (Chief Executive Officer and Executive Chairman)
  • Michael Evans (President and Director)
  • Xu Hong (Chief Financial Officer), also now as Toby Xu
  • and others

Joseph Tsai is Taiwanese-born and has several ownership stakes in the USA, such as the New York Nets NBA Team.

Hong, chief financial officer, was appointed just in April.

Michael Evans, the president, is in charge of Alibaba group holding's international strategy for globalizing the company.

The most influential board members include Tsai, Zhang, Evans, and Xu.


4. Which role does the Chinese Communist Party (CCP) play in Alibaba, and which are the risks of an investment in Alibaba?

Role of CCP

Of course, the political risks, pressure from the Chinese leadership to show their power dominance, pressure from regulators, and the subsequent crackdown on Chinese tech names do not help. It means increasing pressure from sellers in the stock. Capital flows are always significant! Is the risk priced in the shares of Alibaba?

The CCP is the most powerful political institution in China and affects Alibaba in terms of increasingly strict regulation.

Risks of BABA investment

1) Chinese Financial Market has Risks

Alibaba Group Holding Ltd is a Chinese company. The Chinese stock market has risks because of the leadership in the country, and the financial markets are not as developed as in the US. Do you know for 100% that you own the shares? Is it a free market? Hard to tell.

So there are a couple of things that pose risks. Let us also look at the potential opportunity. Alibaba still is a blue chip name, one of the biggest companies in China, and they have significant network effects, a proven business model, and they are kind of like Amazon or Google.

2) Political and Regulatory Risks

Political risk and risk from Chinese regulators come from the fact that the CCP is the boss in the room. Xi Jinping and Chinese regulators are increasing the pressure to curb the power and influence of Chinese internet giants such as Alibaba.

Jack Ma stepped down (clearly on 'request'), and there are curbs on using subsidies to grab market share and new data security regulations.

So are the political risk and the regulatory risk that high? Generally speaking, I would say to stay away from Chinese stocks. In this case, the risk seems to be low compared to the potential reward. The asymmetry of the investment is there. Why not take a starter position?

Chinese financial markets are less developed and carry political and regulatory risks. The CCP seems to curb power in firms such as Alibaba. Therefore, BABA shares are directly affected by politics and regulation.


5. Fundamental Analysis of Alibaba shares

Analysis of P/E and Market Cap

Now let us look at the fundamental data and key statistics such as the P/E and the BABA business model.

The current market capitalization (total valuation of the equity) of BABA is around $270B. What is Amazon's? Probably 4 to 5 times higher than that.

Suppose we look at the price-earnings ratio data (P/E) historically. We can see the P/E of BABA has been around 60x at the max and 15x at the min. Currently, the P/E sits around 26x, which is still low historically.

Source: Koyfin

Price Earnings Ratio of Alibaba and Valuation Bands

Analysis of EV/Sales, EV/EBITDA, P/B

If we look at the enterprise value data (equity value plus debt minus cash; the amount to purchase the whole company) to sales number (EV/sales), it sits around less than 2x, which seems cheap.

Historically, the EV/sales number has been much higher (20-30x). So a 2x EV/sales mean you need to buy two times annual revenue to buy the whole company. It sounds not that expensive.

If we look at other metrics such as EV/EBITDA, it sits around 9x, and Price to Book (P/B) around 1.7x. Low valuation across the board.  At least for now, subject to change.

Enterprise-Value vs. Sales for Alibaba

Evaluation of BABA's Fundamentals and Valuation

So, the stock has been crashing down 76%. Is the fundamental data that bad? The relative valuation multiples so far say no.

Suppose we look at the market cap of $270B of BABA again. And compare it to their total debt of $27B and a cash position of $77B.

There is no way we can say BABA is overleveraged, and they are sitting on a huge cash pile (roughly a third of the company's equity value) and carry relatively low debt. So these numbers look solid. Absolute numbers, like quarterly revenues for 2020, are going up. Overall, growth and revenue look healthy.

Cash from operations. Positive, excellent, and stable numbers. Their core business is working, and they produce money from it.

What are they doing with the cash? They seem to invest in it regularly. In what? Capex. Why wouldn't you as a healthy business? They also seem to be buying back their stock. Not so dumb at current valuations.

If we look at the cash from financing data, they seem to be paying down debt—another positive sign. Free Cashflow data also looks good. Still upbeat, and BABA is generating free cash after all activities.

So overall, we can conclude the balance sheet and metrics, such as the P/E, looks healthy.

Alibaba is similar to Amazon but has a much smaller market cap. BABA's fundamentals look solid, and valuation metrics are low.


6. Technical Analysis of Alibaba shares


Analysis of Monthly Technical Chart of BABA

The Figure below shows the monthly technical price chart of BABA traded on the NYSE.

The stock was $68 at the IPO in 2014. It went up and peaked at roughly $100, then crashed back down to $60 and ultimately had a big run up to $300.

Notice the breakdown of an uprising wedge. Within a short period, BABA is in a substantial downtrend. The drawdown is not only deep but also quick

Technical Analysis of Alibaba (BABA)

Let's compare the drawdown to other periods of BABA stock decline. It had a previous 52% and 38% drawdown, and the maximum drop was a whopping 76% and is still sitting on minus 71%—an incredible beating.

Please also note that we are sitting on a significant support level. The wicks on the price candles of recent months indicate buying pressure building up.

Alibaba stock has declined over 70% in just a few months. The price is at significant support and trades close to its IPO price.



7. Sentiment Analysis of Alibaba shares

The sentiment is bad for the stock of Alibaba Group Holding Ltd. The headline of Fortune shows it well: investors in Alibaba group holding limited are quick to sell on any negative rumors first and ask questions later.

The same negative view shows when analyzing the sentiment of Alibaba investors and analysts on Twitter. People are skeptical, and Alibaba shares have gone down almost a straight line.

Where is the bottom? Is there one? For sure, most people are a little bit scared right now.

Fortune Article proves that Sentiment for BABA is very bad

What about great investors? Where are they deploying capital? For example, Bill Miller of Miller Value Partners has steadily increased his BABA position, and it is the most significant position in his portfolio. He sure does not seem scared compared to the average investor and analyst.

Positive capital flows by proven veteran investors such as Miller are a good sign. Follow the money.

The sentiment in Alibaba shares is terrible. Analysts and investors are scared, but great investors take positions in BABA.

Bill Miller of Miller Value Partners has Alibaba shares in the Portfolio


8. How can you structure an investment in Alibaba, and How should you size your position in Alibaba stock?

How to structure an investment in BABA?

You can buy shares of BABA directly on the NYSE from your broker. Alternatively, you can invest in Alibaba through mutual funds, exchange-traded funds (ETFs), or other investment vehicles.

I am not a fan of derivatives for several reasons and don't like buying BABA through a fund. You sure can do that.

As a private investor, I want the real thing (own physical Alibaba shares in my account) - this gives me total control regarding position sizing and risk management.

An easy and effective way to structure a long position in BABA is by simply buying the physical shares from your broker.


How to size positions in BABA?

The question is always: how do you position size this? For this quick analysis, I feel comfortable with a small position.

Larger position sizes require more work, in my opinion. I rather have a more diversified portfolio and find more ideas.

Overall company exposure is less than 1%, and exposure to the Chinese tech sector is 1-3% at max. These are just some numbers that I am thinking of for myself.

Never forget Warren Buffet's number one rule: do not lose money. Small position sizes will protect your portfolio from significant downsides. So, with intelligent position sizing and overall portfolio construction, I don't think taking a stab at BABA here is a bad idea.

Small positions (e.g., 1-3%) will protect your portfolio and enable a nice profit upside for long-term investors.


9. On which stock exchange should you buy Alibaba stock?

One of the things to decide is, on which exchange could it be a potential buy? Is it the NYSE? Or the Hong Kong Stock Exchange?

Of course, there is always a battle between the US and China. How high is the delisting risk on the NYSE and Hong Kong exchange?

Probably lower risk on the Chinese mainland. Why would they delist one of the best stocks in their own country?

Arguably, the lowest delisting risk of BABA is on the Hong Kong Stock Exchange.


10. Should you buy Alibaba shares now, or should you stay away from the stock?


Summary of the stock analysis of Alibaba Group Holding Ltd:

  • High quality, blue chip company with significant network effects and a proven business model
  • Has potential risks (regulation, political risk)
  • A lot of cash, not a lot of debt
  • Market cap is much lower than peers in different geographies (e.g., Amazon)
  • The valuation seems low based on low relative multiples historically and still solid absolute fundamental metrics such as sales, earnings, and cash flow.
  • They produce a lot of cash from their primary operations to reinvest their business, buy back stock, and pay down debt.
  • Free Cashflow
  • Technicals show significant punishment of BABA (minus over 70%), which does not seem to be justified long-term.

Alibaba has a monopoly business, shows solid fundamentals, and has an attractive valuation but carries political and regulatory risks. Price dropped over 70%, sentiment is low, and a small long position offers an excellent reward to risk.


How can you learn more about the analysis of Stocks and Investing?

If you want to learn how to invest, how to analyze stocks such as Alibaba in great detail, and how to become a financially successful investor, there are several options for you:

Learn how to invest with Financial success at H2 Intel.

Disclaimer: Please do your research. This analysis is not financial or investment advice and only for entertainment and educational purposes. You are responsible for your actions.

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I hope this analysis is helpful to you.

Until next time.

Best,
Harry

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